Monday, October 20, 2014

"Standing on One Leg": Making Decisions in Troubles Times

By IMTFI Researcher Gianluca Iazzolino

"Hal lug ayeynu ku taaganahay," Somali refugees say. “We stand on one leg.”

This effective metaphor conveys the precariousness and volatility that permeate the daily experiences of refugees. Standing on one leg implies the possibility of falling, but also the potential to move. It is a state of suspension, where every signal must be caught and decoded, because from that may depend safety and survival, for oneself, one’s family, one’s livelihood. Indeed, the idea of contingency was at the centre of my research proposal when I first came to Eastleigh, the Nairobi estate dubbed Little Mogadishu for the conspicuous presence of Somali people, either refugees or Kenyan citizens. I was thinking of the contingency which has been defining Somali mobility patterns since the Somali state collapsed in 1991. Yet, in the months ahead, the concept acquired a dramatic actuality.

Indeed, these are tough times for Somali refugees in Kenya.

Kisenyi. Photo by author.
Since the Kenyan government became embroiled in the Somali conflict in 2011, the whole Somali community in the country (encompassing both Somali Kenyans and refugees) has been increasingly portrayed by politicians and media alike as a potential fifth column of Al-Shabaab, an Al-Qaeda affiliated Somali organization. After invading Southern Somalia, officially to prevent terrorist infiltrations, Kenya has conjured up the very demon it aimed to exorcise: a spat of terror attacks (culminating with the raid of Al-Shabaab gunmen in Nairobi’s Westgate shopping mall in September 2013) that has shed blood and triggered ethnic profiling, and given free rein to corrupt police to abuse and extort money from refugees. Refugee mobility has increasingly been restricted to camps and a massive security swoop, operation “Usalama Watch,” has lead to round ups and deportations to Somalia. Many, particularly the youth, are moving to Uganda, where a progressive refugee act allows refugees to circulate freely. 

Financial practices have a crucial role in decision-making strategies against this volatile background. The long-established hawala system enables businessmen to move capital to new areas where trade opportunities are flourishing, such as Kampala, Kigali in Rwanda, the DRC border and, until recently, Juba in South Sudan. At the same time, the usage of Safaricom M-Pesa mobile money across borders facilitates the transfer of small amounts to sustain students and small businesses between Kenya and Uganda. The way the two infrastructures are used and interwoven reflects the importance of cultivating multiple financial options to respond to unpredictable situations.   

Eastleigh. Photo by author.
The story of Abdiqadir Cali is a vivid example of how this combination occurs in practice. I first met him in the Bangkok mall, one of the many trade centres that are the landmarks of Eastleigh. He was 26 years old, had a refugee card and a reputation as a computer wizard. He had flown to Kenya in 2009 after the Islamist militias of Al Shabab had captured the city of Baidoa, in Bay region, Southern Somalia, where he was born and where his family still lives. He spent a few months in his cousins’ house in Mandera, on the Kenyan side of the border, and then, driven by the desire to get formal education, moved to Eastleigh. Once again, some relatives offered him hospitality and a little financial help with which he enrolled in a technical institute. After a year, though, his funding dried up and he was forced to withdraw. Yet, he had discovered that he was particularly talented in resurrecting laptops and computers. “Let’s ask Abdi” became the immediate reaction to a crashed system, and his name – and mobile number – started travelling via word-to-mouth or SMS. It thus spread outside Eastleigh, Nairobi and eventually Kenya, spurring a flood a job offers from as far as Mombasa and Kampala. His customers were mostly Somalis and a few Kenyans and Arabs from the coast, all wanting him to fix their apparently dead devices, packed and shipped by bus to Eastleigh. Abdiqadir Cali became busy dismantling and reassembling laptops and PCs, constantly informing his customers about this or that spare part to purchase, payment upfront. The money was sent through M-Pesa and Abdiqadir Cali used his mobile phone as a wallet, through which he received payments and where he stored his monthly allowance. In fact, he had his savings somewhere else: each month, he transferred a sum to his family back in Baidoa using Dahabshiil, a major hawala company. He thus converted the KSh received through M-Pesa in USD and deposited the amount in a local branch of Dahabshiil, which made it immediately available to the designated recipient in Baidoa. “I keep tab of my transfers and my mother takes care of my money”, he said. “One day, I will use it to start a business.” In the meantime, though, his savings were shoring up his family’s livelihood and fostering his siblings’ mobility aspirations: one of them was set to move to Kampala, tapping into his older brother’s little wealth to fund his journey.

I got in touch with him after the Kenyan police launched the crackdown. He told me that he had been arrested by the police and forced to pay the equivalent of 50 USD to avoid deportation to the Daadab refugee complex. Now, he was planning to follow his brother to Kampala, where in recent years a new Little Mogadishu has grown in the slum of Kisenyi. He was confident that in Uganda he would be able to rely on his hawala account and even to expand his customer base in the country and in neighbouring countries.

“When you are standing on one leg, you need to move,” he said, “if you don’t want to fall down.”

Read more in Gianluca Iazzolino's final report, "Contingency Routes: Somali Flows and Transnational Spaces between Kenya and Uganda."

Wednesday, October 15, 2014

The Socio-Political Context of the New Financial Architecture and Public Electronic Money System in Ecuador

By IMTFI researcher, Javier Félix

A proposal for a “New Financial Architecture” has emerged in Ecuador as a response to the previous neoliberal financial model, to reclaim the role of the state in financial regulation. It aims to strengthen the state’s monitoring system and its institutions and build a financial safety net to avoid catastrophic events in a crisis, like the one experienced in Ecuador at the end of the 1990s, which resulted in the adoption of the U.S. dollar as Ecuador’s official currency. Furthermore, this proposal seeks to adjust the monetary and financial framework of the Central Bank to the country’s system of dollarization. An additional and equally important component, which reflects a political economic strategy, is the inclusion of the so-called “popular and solidarity financial sector” (sector financiero popular y solidario)—which includes credit unions, savings and credit cooperatives, community banks, and so on—as a focus of this new domestic financial architecture. The proposal thus seeks to expand financial services, in particular, to the rural sector.

Central Bank of Ecuador’s stand of the Electronic Money System
at the 2014 Campus Party in Quito (Photo by Javier Felix)
One of the most groundbreaking components of this New Financial Architecture is the implementation of an electronic monetary system, operated mainly through mobile phones, for which the Central Bank of Ecuador (CBE) will serve as the issuer and administrator. Officials at the CBE consider money to be a public good and see the electronic money system as a way to democratize its use. This is a unique proposal in the global context of other mobile money deployments. There have been many experiences in the private sector, which have shown that there are a variety of factors influencing the success and failure of a project, as well as a variety of ways to measure the impact of mobile money on financial inclusion and the household economies of its users. In many examples, partnerships between financial institutions and mobile network operators have resulted in privately run initiatives, oriented primarily to profit by directing users’ consumption to particular companies.

However, this would be the first state-owned experience of public mobile money.

The proposal responds to Rafael Correa’s left-leaning political project embodied in the National Plan for Well-Being (Plan Nacional del Buen Vivir), which serves as a guide to the implementation of public policy for the coming years. The participation of the Central Bank, as the leading authority for the implementation of electronic money, corresponds to the government’s objective to reclaim its role as regulator and administrator of public goods. As a consequence, public policies and regulations have been created to limit and restrict the participation of the private sector, including companies and non-governmental organizations, in the interest of consolidating governance. Furthermore, this political agenda includes reforms to the financial sector in order to strengthen the entire system, especially the “popular and solidarity financial sector,” and, it is often argued, to prevent financial crisis.

For the implementation of the system, the state had to amend the Monetary Regime and State Bank Law (Ley de Régimen Monetario y Banco del Estado). One of the main provisions of this regulation is that “electronic money issuance must be an exclusive function of the state, which ensures and gives confidence to the carrier of this payment method, its free availability, and its condition as legal tender.” This limits the development of private projects of mobile money in Ecuador. With the imminent implementation of the electronic money project, which will most likely be rolled out by the end of 2014, there have been objections and arguments questioning to the proposal, especially coming from some representatives of private banking, financial analysts, and the press. The main concern was that the Central Bank could issue electronic money without backing, thus bypassing dollarization and enlarging the supply of money in the country. However, some of these doubts were assuaged after a new manual for the operation of the electronic money system was issued in June 2014.

The electronic money system, as defined by the Central Bank team in charge of implementation, is a set of operations, mechanisms, procedures, and regulations that facilitate the flow, storage, and real-time transfer of monetary value between different economic agents. These transfers will be made ​​through the use of electronic means such as the Internet, mobile devices, smart cards, and others. Like elsewhere in the world, the objective of implementing an electronic money system in Ecuador is to improve the inclusion of marginal sectors to financial services and use financial inclusion as a mechanism to ameliorate poverty. But the Ecuadorian Central Bank wants to set a precedent in the world, that such systems should ensure the open and democratic participation of all stakeholders. In creating a public system, it seeks to be broad in terms of the interaction and the relationship between the state and the actors of the financial system, whether they are public, private, or belong to the “popular and solidarity” sector.

The Central Bank’s cutting-edge proposal to create a public electronic monetary system still needs to answer the question of how can it generate a more significant impact than privately run systems. Since the project hasn´t yet been implemented, it is unknown how Ecuadorians will respond to the system. Will they trust in this new means of payment? Are people from rural areas and marginalized urban neighborhoods willing to use their mobile phones for daily purchases instead of cash? Money, as a social agreement, needs people’s trust and approval to be part of their lives. Is electronic or mobile money going to herald a new kind of social contract? How will it unfold in Ecuador?

Monday, October 6, 2014

Ghanaian Rural Women Traders' Cognitive Understanding and Perception of Mobile Phones and Money Systems

By IMTFI researchers Dennis Chirawurah, Deborah Elzie, and Seidu Al-hassan

Mobile technology has gained prominence in the development agenda of the government of Ghana. This is because mobile technology has the potential to reduce poverty by providing access to financial services like savings and money transfer to users. This research employs a participatory approach to examine local self-sustaining eco-systems, cognition, and perceptions about mobile money systems as a means of enhancing livelihoods in Ghana. The study was carried out among one hundred rural women traders, randomly selected and interviewed from the Kasena Nankana Municipality in the Upper East region of Ghana. The study results showed that 90% of the traders interviewed rely on home savings for both trade transactions and household sustenance. About 77% of the traders interviewed use mobile phones and have done so for a period between 1-5 years. The MTN mobile network (the local mobile service provider) was reported as the most commonly used communication network. Poor network connectivity remains the biggest challenge to traders, and 82% still have no idea about mobile money or its perceived risks. Almost 81% of the traders reported that they do not use a barter system in their trading. Mobile money systems are still largely unknown among rural women traders. This may be attributed to the fact that rural areas lack the necessary communication infrastructure to support efficient money transfer. Only 2% of the respondents use mobile money and their use is only limited to sending money to their wards in schools as well as receiving assistance from relatives but not for trade.

Traders in the market. Photo by authors.
We spoke with a rural woman trader dealing in millet and pito malt who put the value that mobile phones bring to rural trade in perspective. Speaking in the local language (Kasem) she said:

“The coming of the mobile phones have significance for us as rural traders. I for one, I am trading in millet and process and sell pito malt to pito brewers. I will usually join the lorry to Fumbisi and Gushegu where I buy the millet on the market days. Most of the market trucks that usually ply on these routes are not road worthy and at times we can spend two days on the road due to truck breakdowns. With the mobile phones it has made my trade transactions a lot easier and cheaper to do. Now I can call the millet sellers from the markets prior to the market day to discuss prices, quantities I need and to introduce a person who will deliver my cash or even arrange to buy on credit. With this prior arrangement, the seller is able to arrange for the millet to be loaded and delivered to me on Navrongo Market day in Navrongo. The phones have therefore helped us cut down on the cost of doing business and by that increase our profits. It also helps us to save time by not traveling to distant markets to buy food. This way the time is used to engage in farming and household chores. The only dark side of the phones too is when the network is bad and you try several times without success to connect to your trade partner from the distant markets.”

At the interface session, where the concerns of rural traders were presented to mobile network service providers and local authority officials, she reiterated the need for the service providers to seriously address the challenges so identified and to make their services more reliable and accessible to rural women traders.  

Traders in the market. Photo by authors.

Nevertheless, given the high mobile phone usage among rural women traders in the study area, and the reported transportation of cash in rural trade transactions and the potential risk associated with bulk cash handling across long distance trading markets, the need and potential for mobile money usage is high among rural women traders. The focus of subsequent research will need to be targeted at designing mobile money systems that are appropriate, inclusive, and responsive to the savings and trade transaction needs of poor and marginalized rural women traders.

The final report from the project can be viewed here.

Monday, September 22, 2014

Automated Teller Machine (ATM) Uses and Challenges in Southwest Nigeria

By IMTFI researchers Oluwatayo Tade & Oluwatosin Adeniyi

On July 1, 2014 the cashless policy introduced by the Central Bank of Nigeria (CBN) became operational in all thirty-six Nigerian states and Abuja. Hitherto, the cashless policy was already in operation in about eight locations, distributed in business zones around the country. The cashless policy in Nigeria aims to engender financial inclusion by limiting the volume of cash transactions. The policy stipulates a "cash handling charge" on daily cash withdrawals or cash deposits that exceed N500,000 (about US$3,030) for individuals and N3,000,000 (approximately US$18,190) for corporate bodies. The new policy on cash-based transactions (both withdrawals and deposits) in banks aims at reducing the amount of physical cash (coins and notes) circulating in the economy, and encouraging more electronic-based transactions in payments for goods, services, and transfers, among others.

An Ecobank client uses an ATM. Photo credit: Oluwatayo Tade & Oluwatosin Adeniyi
In designing the policy, the CBN envisioned it as a means of curbing negative consequences that arise from the heavy usage of cash in the economy such as: the high costs of printing, handling, transporting, and storing cash; the high risk of using cash (such as robberies and other cash-related crimes); the circulation of money outside of the formal economy; and inefficiency and corruption, both of which are more easily facilitated with cash. On the basis of the forgoing observations about the use of cash, the deployment of e-banking and e-payments platforms has been touted by the CBN as a veritable "way out of the woods." Setting daily limits on automated teller machine (ATM) withdrawals is an integral part of the CBN’s cashless policy. However, banking and finance technologies such as ATMs are also associated with instances of fraud. Despite this, the victims' perspectives that would allow policymakers to make informed decisions and address emerging challenges associated with crime-related problems stemming from the cashless policy are rarely documented. The problem is phenomenal when considering the number of clients who use ATMs.

ATM cardholders do not usually have just one card. The possession of ATM cards for different banks is a rational attempt to avoid the charges placed by banks on clients from another bank using their machines. Until it was stopped by the former CBN governor, Sanusi Lamido Sanusi, the charge was N100 (about US$0.63) for every transaction. Clients therefore reported that they were conscripted not only to obtain ATM cards for their accounts, but also to use their bank’s own ATMs as they were charge-free. Most cardholders obtained their cards due to coercion, particularly through imposition of charges on manual withdrawals, while others obtained the card voluntarily.

As a banking and payments technology under the cashless policy, clients use ATMs to check account balances, transfer money, withdraw cash, recharge phones, and pay for utilities such as electricity and digital satellite television services, among others. We found that knowledge of this technology influenced the extent to which it could be explored. Despite this, participants in our study reported that their primary motivation for using ATMs was that they more easily facilitate access to cash.

Sensitive to the potential security challenges in using this platform, the study participants altered their routine activities to a "safe period" of the day before using the ATM. The time of day that participants preferred for withdrawals was related to ease of access and security. For instance, withdrawing money very early in the morning was a rational decision because foot traffic would be lower and  participants would have easier access to ATMs. Moreover, very few participants--except those needing money to execute transactions--opted to withdraw cash during the day owing to network problems and long queues. Withdrawing at night had significant security challenges as ATM cardholders risked being robbed or otherwise dispossessed of their cash.

Clients using ATMs at a non-bank location. Photo credit: Oluwatayo Tade & Oluwatosin Adeniyi
At the functional level, ATM usage has reduced long hours of queues in the banking halls emblematic of the pre-cashless policy era, while it has influenced the spending culture of users. With respect to usage, the challenges listed by participants included: cash dispensing errors; infrastructural problems associated with the ATM network, which often deny clients access to their money when they need it; and ATM fraud. Despite these challenges, the availability of money within any locality where ATM machines are located seems to be endearing users to e-payments systems in Nigeria. This development has potential for fostering financial inclusion.  

You can read Oluwatayo Tade and Oluwatosin Adeniyi's full report here.

Monday, September 8, 2014

Leveraging Mobile Value Added Services (MVAS) for the Growth of Women Micro-Entrepreneurs (WMEs) in Fiji

By IMTFI researcher Milind Sathye

The ever-increasing penetration of mobile phones presents enormous opportunities for women micro-entrepreneurs (WMEs) in developing countries, including Pacific island countries such as Fiji, to grow their businesses. Existing research by organizations such as the GSMA suggests that mobile services are being utilized by women to empower their lives. The Cherry Blair Foundation for Women cites several studies in countries such as Indonesia, Egypt, and Nigeria in which nearly 88% of the women interviewed desired mobile value added services (MVAS) to grow their businesses. Prior studies by the IMF in Africa have found that MVAS contributed significantly to the growth of micro-enterprises. Delivery of MVAS such as m-banking and m-enterprise services to WMEs is particularly important for business growth through access to information, payment services, advertising, communication, and is found to enhance social welfare leading ultimately to poverty alleviation.

Fast food/tea vendor (WME), Suva, Fiji (Photo by Milind Sathye)

A team consisting of Prof. Milind Sathye, Prof. Biman Prasad, Prof. Dharmendra Sharma, Dr. Parmendra Sharma, and Dr. Suneeta Sathye proposed to study the unexplored situation in Fiji and identify the challenges faced by WMEs in the use of MVAS so that suitable policy initiatives could be taken by the Fijian government for faster growth of this sector. We focused on WMEs because of their importance from the standpoint of inclusive growth. The International Centre forResearch on Women found that ‘improving women’s access to technology has the potential to spur their economic advancement and stimulate broader economic growth. Regrettably, technology has been underused in unlocking women’s economic opportunities’ (2010:2).

We found that most WMEs owned Nokia phones, followed by Alcatel; other brands such as LG, Sony, and Motorola were not used by many. Further, a substantial proportion of respondents had prepaid subscriptions. The average expenditure of respondents on mobile services was less than US$16 per month, which the WMEs consider to be relatively high. Few respondents used data service (such as emails, attachments, web browsing) on their mobile phone while most were using SMS in addition to voice. Availability of affordable data services would help access to information and communication.

The WMEs identified the following main challenges:

Access to information: The WMEs felt that government departments should provide information about programs for women over the mobile phones, and that it should also be possible for them to interact with the government via mobile. The government agencies in Fiji were not making use of MVAS capabilities, which is a major hurdle. It increases the transaction costs for WMEs as they are required to deal with these agencies in the traditional way, that is, by personal visits or through mail, which is comparatively costly and time consuming.

Access to training: The WMEs desired basic training on the use of MVAS applications from government agencies such as the National Centre for Small and Medium Enterprises Development (NCSMED). Younger entrepreneurs were more enthusiastic about the use of MVAS applications. Appropriate training by government agencies for WMEs would help them realize the potential of MVAS applications for the growth of their businesses.

Absence of a forum: Many WMEs stated that there is no forum available to discuss issues related to mobile phone banking or MVAS. Consequently, the issues remained unresolved. The Consumer Council of Fiji was unable to take up their cases as WMEs are classified as ‘businesses’ and not as ‘consumers’.

Over-regulation: WMEs were unequivocal in their opinion that over-regulation is the main problem that is hampering their growth. They are not allowed to operate from home, which increases their operating costs. For example, a day care centre can’t be run from the home of the WME, and so one has to rent separate premises which increase operating costs and also puts clients at a disadvantage.

Access to insurance, finance, and capital: The WMEs stated that banks are reluctant to provide finance and services like insurance to them. There are limited grants available to WMEs, and the NCSMED could play a more proactive role. Some of the WME respondents found the interest rates and bank fees to be prohibitively expensive. Furthermore, the WMEs stated that even small shocks from the market throw them out of business, but no policy is currently in place that could help them overcome such situations and revive their enterprises. Lack of capital was identified as the main hurdle in business expansion.

The respondents stated that if these challenges could be addressed through MVAS, they would be willing to use such services. Access to business tools, access to mentorship, and access to markets were the top three purposes for which the respondents would like to use MVAS applications. The WMEs were also willing to pay for such applications. When asked which platform they would be comfortable with for accessing relevant mobile services, the respondents indicated SMS, followed by IVR, WAP, and USSD.

The interviews with WMEs revealed that they were aware of the value of MVAS for business growth and were willing to pay for such services if their business challenges could be addressed.

Interestingly, despite the demand for MVAS, the providers of such services lagged behind. We interviewed key industry experts and policymakers to understand the supply-side issues. Seven major themes emerged from these interviews:

Licensing regime: It is important that Fiji prescribes a licensing regime for MVAS players, and such players could be brought under the license category of ‘other service providers’. MVAS needs to be accorded industry status for there to be an orderly development.

M-payments: While in some countries there is a resistance to m-payments as there are concerns that it may lead to tax evasion, the experience of China is different and such payments were found to have forced merchants to report more of their sales than before, which increased tax revenue. Fiji may like to consider similar measures.

Competition from mobile network operators: Financial institutions in Fiji are worried about competition from mobile network operators (MNOs). The banks contend that such operators are not considered as ‘banks’ and so are out of the purview of banking regulation, which is detrimental to competition. The Reserve Bank of Fiji, however, has concerns about the supply of money, including electronic money, falling off of the radar.

Infrastructure cost: Industry representatives pointed out that the high cost of setting up a mobile tower – anywhere between US$408,000 to US$489,000--is a major hindrance to the rapid spread of MVAS. Because of the competition between Vodafone and Digicell, the towers are not being shared. Given that the population of Fiji is sparse, it would help if either the government provided subsidies for tower construction or there was legislation mandating that MNOs share towers for a price.

Lack of interoperability: The CEO of South Pacific Business Development (SPBD) stated that mobile phone banking is still young in Fiji, with the major hindrance being a lack of interoperability.

Misleading statistics of penetration: The CEO of SPBD stated that the statistics of mobile penetration are computed as a ratio of the number of mobile phones or SIM cards issued to a population, but many Fijians have multiple phones and even tourists can have SIM cards. A more effective method would be to count the number of mobile phone accounts.

Which P2P model? Of the three P2P payment models--that is, the remittance service provider-dominated model, operator-dominated model and partnership model--industry representatives believe that the partnership model would work better for Fiji given the limited size of the market.

The view of the market where the fast food/tea vendor is located
(Photo by Milind Sathye)

Overall, MVAS can make valuable contributions to the growth of WME businesses in Fiji, but their deployment is hamstrung by the policy hurdles and industry challenges outlined above. Fijian authorities need to pay urgent attention to remove the barriers for deployment of MVAS to promote growth of WMEs, which in turn could help alleviate poverty. 

Read more about this research in a report by Milind Sathye and Biman Prasad.

Friday, September 5, 2014

Domesticizing Financial Economies: A Mini-Conference Report

IMTFI Fellow José Ossandón recently co-organized a mini-conference on "Domesticizing Financial Economies: Knitting Fibers of Transaction, Algorithm, and Exchange." The event was part of a meeting of the Society for the Advancement of Socio-Economics in July 2014. IMTFI Fellows Isabelle Guèrin and Magdalena Villarreal also participated, presenting results from their project on credit and wealth in India and Mexico, along with Lya Niño, who presented with Villarreal about their new research on the everyday economic practice of juggling currencies in trans-border contexts.

José and his co-organizers Mariana Luzzi and Jeanne Lazarus wrote about the event and several of the issues raised there for the Estudios de la Economía blog and the Charisma Network. They explain that presenters focused on both the work of credit scoring and evaluations and on the consumer side of finance, and they suggest that research that complicates our understandings of the poor's financial ecologies allows us to re-think models of financial inclusion as well.

Read the entire report here!

Monday, August 25, 2014

A Study on the Association of Social Capital with Microfinance and Local Saving Programs among the Muslim Poor in Hyderabad, Andhra Pradesh, India

By IMTFI researcher Rosina Nasir

Why do people trust each other? What are the characteristics of people who trust each other? Is it mutual trust which results in formation of groups, or is it self-interest which brings people together? How does the theory of rational choice relate to the concept of social capital?  The following discussion concerns the concept of social capital and its applicability, and argues that the sustainability of self-help groups (SHGs) does not depend only on social capital – trust, shared knowledge and reciprocity, important as these are – but also on the nature and extent of social relationships among (a) the group members themselves, (b) group members and program/credit officer(s) staff, and (c) each member's pursuit of self-interest. A central issue for understanding levels of trust in various societies is to grasp whether trust follows social capital of other kinds or whether it is itself a major category of social capital.

In the present project, several SHGs were studied which differ in their composition and methods of formation. An attempt is made to determine the degree to which the concept of social capital has penetrated these groups, and its outcome as financial inclusion and development in the microfinance model. Field surveys were conducted in two phases. The first phase was used to identify different SHGs and private players in microfinance in Hyderabad and establish a working relationship with them. After visiting three SHGs, one was selected to pursue further study as it was formed voluntarily two years before its association in 2008 with Roshan Vikas Mutually Aided Cooperative Thrift Society. During the second phase information was collected through interviews and focus group discussions from SHGs – both homogenous and heterogenous – in the Charminar Area of Hyderabad with respect to their caste and religious-based affiliations. There were more than 15 groups, for an approximate sample size of 130 women in total. Photographic and voice-recording techniques were used for informal talks with the SHG team leader, loan officials and other members of the SHGs.

The Concept of Self Help Groups (SHGs) in India

There are numerous types of self-help groups in low-income countries. The group formation may be facilitated by an NGO, by a Microfinance Institution (MFI), by a bank, or it may evolve from a traditional rotating savings and credit group (ROSCA). In the Indian context SHGs are largely referred to the SHG Linkage program initiated by the National Bank of Agriculture and Rural Developments (NABARD) as a pilot project in 1991-92 to promote rural access to banking services and target credit at some specific activities and certain disadvantaged groups. This program emphasises that financial inclusion is crucial for poverty alleviation, gender equality and empowerment. An SHG is an informal organisation of up to 20 people and is supposed to be homogenous with respect to class, caste and status to maintain group solidarity and to prevent clashes. They voluntarily and regularly create a pool of savings. These small savings are accumulated to serve as an internal source for lending to group members at a mutually agreed upon interest rate. This process teaches them financial discipline, organizational skills, and bookkeeping, and enhances their capability of managing their funds adeptly. With a good track record of financial and credit performance, SHGs are provided with loans by banks in response of their savings. Need acts as a magnet which attracts members to form groups, either to smooth their consumptions or to finance investment projects with extremely short gestation period. One may couple the concept of SHG with women and the poor predominantly of low caste as 90% of formed SHGs are composed of such individuals. SHG meetings help to expand trust wherein women engage in conversation with each other thus, strengthen social capital.

Women gather to attend a weekly SHG meeting. Photo: Kabeer (researcher assistant)   
This program initiates linkages processes in two dimensions: institutional linkages between SHGs and banks and financial linkages between savings and credit. Most NGOs act as facilitators for initiating the forming SHGs and then nurturing them until they mature. Once mature, the group is linked to external sources of credit by the NGO. Two other models exist. The first is one in which SHGs are financed directly by banks. The second is one in which SHGs are financed by banks using NGOs and other agencies as financial intermediaries. The latter are rare in practice. SHGs with bank linkage programs are an advanced form of ROSCA as their aim is not limited to accumulation and distribution of the savings pot. Here, groups are connected to banks either through NGOs or directly trained to handle financial transactions and other elements of financial inclusion to make them capable to earn a livelihood. However, these SHGs work internally as ROSCAs wherein interest rates and other modalities are set according to members’ convenience.

Case Study: Trust in Social Relations

A SHG was locally organized in 2008 with the efforts of its present leader, Mrs. Saleema, who works as a trainer in a seamster's centre. This group consists of 12 mostly lower-class Muslim women. Before, it comprised 15 members, but three members withdrew to either form or join another SHG. The leader also reported that these former members had not attended monthly meetings or made regular contributions, and thus with the unanimous decision of this group they were removed. However, these three women had been with the group for six months – the minimum period to show sustainability and solidarity and to become eligible for receiving of loan – and yet two months after they had left the group one by one. What were these women’s reasons for leaving? Were they discontented with the functioning of this group? Or was it due to intra-group problems, disputes with loan officers, or non-conducive interest rates on the loan product offered by Roshan Vikas?

Although the leader of the group gave me her explanations for why the women had either dropped out or been forced out, I was still interested in the perspectives and opinions from the other side. I tracked down one of the women who had dropped out named Rehana. After an in-depth investigation I discovered that kinship and social relationships are closely interwoven with the loan approval process. Rehana is the leader’s paternal cross-cousin, and she suspected that her application had been rejected as a repercussion for tensions in the family over financial matters. However, the loan officer explained that her application had been turned down because of her irregular attendance at group meetings and lapses in monthly savings. Rehana was unconvinced. Eventually she came to the conclusion that her loan application would never be entertained, and so she quit the group in disgust. Discussing Rehana’s case in the group leader’s absence, group members supported Rehana’s story that she chose to drop out due to continuous denial of her loan application, but the group leader explained that group members could not always speak their minds out of fear that their relationship with the loan applicant might sour as a result. After many meetings the group leader finally disclosed the truth that Rehana's financial condition was not sound and that lending her credit was a risky proposition that may have imposed a burden on the group if she defaulted. “Moreover,” she continued, “being my relative I would be held responsible for her default.”

SHG women engaged in papad (papadam) entrepreneurial activities to earn livelihood.  Photo: Kabeer (research assistant)
The negative aspects of the SHG’s kinship-based, horizontal structure of relationships to some extent support Bastelaer’s observation that perfect strangers may be able to establish trust more easily than people with histories of complex relationships with each other (Bastelaer 2000, 5)[1]. Mechanical trust through social capital is growing as members learn to trust strangers more in financial transactions irrespective of risk and uncertainty. This indicates that social capital enables people to trust rationally, and that an element of rationality is the key which inserts trust into social capital. Human beings usually demands unsaid cooperation in social relations which is invariably considered. The crisis arises when the impact of social relations on economic life is negative, is transformed into social friction and creates conditions of distrust. Establishment of trust demands embedded agreement within the structure of personal relations and social networks based on rationality which may prosper or ruin trust if not followed diligently.

Trust in financial institutions like banks is comparatively less. The question remains as to why SHG members distrust financial inclusion instruments like banks. Further exploration revealed that social capital in the present study is not constituted simply by trust but rather through ongoing need-based relationships whereby the trusted has substantial incentive to be trustworthy. The essential aspect of this ongoing relationship is instant fulfillment of financial contingencies, if they arise, without any collateral or documentary compulsions. This facility of acknowledging contingencies does not exist in banks. On the contrary, local moneylenders (LML) endure risk by showing trust in people after screening clients' portfolios, and lend money at an exorbitant interest rate. However, LML uses coercive recovery practices for delay in payment.

Trust is invariably associated with an element of risk, and the degree of risk is higher in the informal financial system (IFS) than in the formal one. Does high reliance on the informal financial system demonstrate the risk-taking abilities of people? Why are people keen to take risk particularly when formal financial institutions provide safer products? Can one connect the practice of informal saving to maxims suggesting that wealth and women should be masked as they are prone to get ruined if they come in contact with the evil eye? In other words, do people make use of informal financial system to multiply and hide wealth? I achieved insight regarding this question while researching the social representations of saving. I started with the assumption that the notion of “living for the moment” or the notion that material things can lead to happiness encourages consumption and retards saving behaviour in a society. I cannot deny the impact of this notion in my study. However, I found something otherwise. 

Informal saving is predominantly found in nuclear families and does not discriminate as to class. It was found that educated and high income families prefer informal financial system for saving, too. Compulsion to use informal savings in low income families is understandable as they have to accomplish everyday sundry needs and maintain social status. Their purpose to participate in IFS is limited and is practiced to ease out their consumption. On the other hand, there is no such compulsion on high income families. Instead, they rotate money in informal market and multiply it through exorbitant interest rates. Their sole purpose is to accumulate savings and further lend money at high interest. In IFS people lend money at interest rates ranging from 5 to 10 percent per month on every dollar. One may infer that trust facilitates the creation of wealth in informal financial system but with a caveat of risk. Trust should not be seen in isolation. Definitions of trust change with needs. People give priority to their needs and pivot trust around it. Due to this reason, people prioritize the need of making high profit and exhibiting trust around instruments and systems that do so despite of financial insecurity and uncertainty.

Need alters people’s traditional perspective on financial matters. Due to prohibitions on usury, lending and borrowing is forbidden in Islam. However, Muslim SHG members challenged this restriction with an argument about rationality and contextuality. Even though usury exists in many financial instruments, Muslim women are not opposed to using them. According to them, survival and basic needs come first. This research concluded that the source of social capital does not exist in inherent trust cultivated through interaction, but rather in ongoing need-based relationships which shape an environment of trust and thus creates social capital. The concept of social capital in SHGs is interpreted as a medium of financial inclusion and empowerment of women. Real empowerment exists in financial independence and participation in work activities which can assure less instances of default and the sustainability of SHGs.

[1] Thierry van Bastelaer (2000): Imperfect Information, Social Capital and the Poor’s Access to Credit.