The Role of Mobile Money in Replacing Cash in India

by IMTFI Researcher Lakshmi Kumar

Mobile money as an intersection of finance and telecommunication faces regulations from both these sectors. Most underdeveloped economies have a poorly regulated financial sector, with the bottom third of the population having hardly any access to banks. Mobile money has provided one solution to this situation.  

In India, there are an estimated 310 million savings accounts with banks. The mobile subscriber base is 680 million, out of which 32% are subscribers based in rural areas (TRAI, 2012-13). The growth rate in mobile subscriptions in rural areas is anticipated to be between 45% and 50% over the next couple of years (TRAI, 2012-13). The link between financial inclusion and information technology has been crucial, and one can observe that mobile services have succeeded in areas where banks have been unable to penetrate. The Telecom Regulation Authority of India reports that 91% of the villages in India are covered by at least one mobile network operator. However, as the network of mobile money operators scale up their services, questions of data protection also arise. What is the state of customer protections mechanisms and how willing are individuals to shift from their comfortable cash transactions to mobile money?  

With the introduction of mobile money in India, we wanted to research the empirical understanding about its role in replacing cash amongst migrant and non-migrant workers in Chennai (Tamil Nadu) and Hyderabad (Andhra Pradesh).  We also wanted to understand the role of middlemen in this broad ecosystem.  Lastly, we want to understand whether the poor trust mobile money. 

Migrant workers constitute about one-third of the population of India, and nearly 70% of them are women (UNESCO, 2012). They are treated as second class citizens, and are often excluded from the general economic, social, cultural, and political mainstream of society. They come from different states seeking employment, and often their first goal is to remit money home. Money transfer takes the form of hawala, the post office, the bank, or the present mobile money transfer. Using a questionnaire, we interviewed migrant workers in the outskirts of Chennai and Hyderabad among whom were both users and non-users of the mobile or non-users to their home. 

We found that on an average income of mobile money users was higher than non-users and additionally transfer of money particularly during times of emergency was higher among mobile money users. There was greater interstate transfer of cash by mobile money users.  Our regression results clearly show that mobile money users send about 14% more than non-mobile users. Also mobile money users send about 34% more emergency money than non-mobile users.  Its usage also increases with age, education and marital status. (For details see, Lakshmi Kumar and Swati Dutta (2015), Role of mobile money in replacing cash: A study among migrant workers in South India, Economic and Political Weekly, Vol l(Issue 28)). Three distinct outcomes became clear about the rationale as to why both the agents and the clients believe in this system.  They are:

1. The client’s potential to save in their home bank accounts through remittances.

2. The automatic client attraction to the product; the pull not the push strategy.

3. The employer who remits on behalf of his client has created a sub-ecosystem of mobile money over unsafe cash.  This is evolving and requires further study.

4. The ‘SMS’ which the clients receive instantly has created trust and safety.

Mobile money is fast catching on in India. Clients, particularly migrants have a need for it, and seem to trust the technology. Our research shows that mobile money has huge potential both from the client perspective as well as from the revenue standpoint. The runaway success of the M-PESA model which is being emulated the world over is a basic remittance model, a model to drive the client to remit money to their family.  In India too, the target by many Mobile Network Operators (MNOs) is to create a single product namely a remittance product and target the same to the migrant worker. 

Interoperability is the mandate of India's central bank, but what seems to happen in reality is very different. We find MNOs tying clients to banks, or, worse still, clients having no access to bank accounts and left to the mercy of their employers for all of their financial needs. Many MNOs have used this basic model as their revenue model. The question that arises is what next?  Figure 1. below is a proposed model for the mobile money ecosystem in India under we create a model path to financial inclusion for migrant workers in India. Ideally we first create a bank account and a mobile account for a client, and then allow the client to transfer money in a manner such that it is bank agnostic. Secondly, the client's account is activated so that he can receive any government transfers to his bank account while he receives a message on his mobile. It is possible for him to transact with his account from any bank/bank branch/MNO.  Thirdly, the MNO goes about acquiring many customers and helps them with the basic remittance product. This follows with the client engaging in other bank products, which are asset-oriented products like savings or insurance products. The MNO then develops mobile wallets for the customer, and simultaneously finds acceptance of the mobile wallet at various retail merchants. The MNO's dual role of connecting people to asset products in banks and to mobile wallets can encourage people to hold less cash, and to instead transfer value to mobile accounts. The whole process obviously requires a change in the mindset of the people. Obviously, when there is a need in the mind of a person there is a chance for change. Just like how the remittance product is a success because of an inherent need of the client, it is necessary for the MNO to look out for the client’s needs and to create opportunities. But sometimes one can preempt a need or create a need--as suggested in the proposed model in figure 1--by being ahead of the learning curve of the client. Thus, this is one model by which a large percentage of Indian workers can be financially included.  

Figure 1: A Model for Mobile Money Ecosystem in India

Given a reality where as per the UNESCO Report-2012, migrant workers make up about 30% of the population in India, there is a huge opportunity waiting to be tapped towards the benefit of this population such that they may be included in the economic, social, and political systems of the country.

Read the full final report here.  

Technology Knows No Age: Voices of Elderly Persons Receiving Mobile-Enabled SAGE Cash Transfers in Uganda

by Julius Okello  

This blog reflects on the immediate impacts of the Senior Citizens Grant, a component of the Social Assistance Grant for Empowerment (SAGE) provided by the Government of Uganda. Digital payments geared toward changing the lives of elderly persons started with the SAGE pilot program in 2011. SAGE remits monthly stipend to beneficiaries aged 60 years and above through Mobile Telecommunication Network (MTN). Although mobile money services have existed for seven years in Uganda, they are still viewed as novel and mostly used by younger generations. With the mobile disbursement of SAGE, however, older persons in Uganda are gradually tapping into these electronic payment innovations. 

SAGE Beneficiaries guided by MTN agents to insert MTN yellow card into yellow easy talk phone 

Initially, when SAGE payments through mobile money were introduced, many of the elderly beneficiaries were very confused. Most of them did not even have a mobile phone, nor did they have any knowledge of how to operate one. Others wondered how they would receive money from a phone -- a machine! This was further coupled with concerns from the older persons and politicians about whether MTN could smoothly implement the program, given the corruption in Uganda that has derailed most government programs in the past as well as the fact that mobile money was still a new technology to reckon with for the “born before computer” (BCC) generation. Nonetheless, senior citizens grants (SCG) beneficiaries are now encountering the reality of mobile money services. Payments to beneficiaries’ mobile money accounts are made through an instant e-money transfer service and are converted into cash by an MTN agent at designated pay points. All beneficiaries are given a five-digit Personal Identification Number (PIN) by MTN and also receive an identification card issued by the SAGE programme that MTN agents use for identity verification. This enables registered MTN subscribers to access their money through authorized MTN mobile money agents in their district. After verification, the recipient’s MTN card is inserted into the yellow talk machine to verify the balance on the mobile money account before paying out the stipulated amounts. While some beneficiaries do not necessarily grasp the entire process of effecting payment, they are aware of the amount that they are supposed to receive. 

Why MTN mobile money for SAGE cash transfer? 

Given past experiences of corruption and mismanagement of government programs for the poor, the Ugandan Ministry of Gender Labour and Social Development felt that SAGE money should be handled by MTN for purposes of: 

• Extending services nearer to older persons.
• Minimizing transfer costs through banks.
• Creating an enabling environment for the elderly who are mostly unbanked.
• Reducing risks associated with handling cash within the ministries.
• Reducing load on management and its associated challenges.
• Minimizing leakage associated with handling cash.
• Guaranteeing transparency and accountability for SAGE funds.

The program was the first of its kind to be implemented by the government through MTN mobile money and it has been fairly effective and serves as a lesson for government, individuals, businesses and development partners.  

Overall, it has been observed that cash transfers through MTN mobile money has improved the nutrition of older persons and their families in Uganda. Over 90% of beneficiaries spend the largest portion of their cash transfer on food and the smallest proportion (10%) reported spending it on alcohol. Meals eaten by beneficiary households have greatly improved; unlike earlier older persons can now afford two reasonable meals per day for themselves and their families, particularly their grandchildren. A 69-year-old woman in Lwamata Sub County revealed, “Because of the availability of quality food, our grandchildren are now happy to go to school, are able to stay in school longer and learn better.” Another respondent in Kiboga town council said, "My grandchildren in lower primary can now carry food stuffs to school for at least three weeks from the time the payment is made by MTN, they are now willing to go and stay longer at school since they have packed food."

Another frequent use of SAGE cash transfers is for medical care. About 52% of the respondents reported having spent the money to pay for their medical bills and 40% used it to purchase prescription medicines. A 77-year-old man from Kibinga sub county, explained, “Before the SAGE cash transfer, I would hesitate to go to hospital because most government hospitals require us to buy medicine. But with the SAGE cash transfer I can easily afford paying for my prescriptions as I am waiting for my children’s assistance.” 

Paying school fees is generally a major problem for most vulnerable families in rural areas. However, this is slowly changing with more efficient disbursement of SAGE cash transfers. According to older persons, with the little they get they are able to invest in school fees as well as buy scholastic materials for their grandchildren. This was confirmed by an 87-year-old woman who stated, “I have five grandchildren whose mothers died of HIV/AIDS. Each of them left children for whom school fees has to be paid. Through the SAGE cash transfer I have been able to educate three of the children up to primary six, senior one and four.” A head teacher was also quoted saying, “Most children in the SAGE households can now ably attend school. Their completion rate has greatly improved compared to before SAGE.” All of these findings are worthy of substantiation by future research.  

Elderly women’s participation in community affairs has also increased with the SAGE program resulting in greater self-esteem and empowerment. Female  beneficiaries feel less discriminated against in their communities; they feel more valued by their families on account of their ability to make social contributions within their families and community. For instance, an 82-year-old woman from Bukomero sub county was able to pay for the funeral of her neighbor's daughter. She said, “Recently my neighbor lost a daughter, there was a need to secure a coffin and other needs. I contributed four thousand, this happened when MTN agents had just paid me SAGE money.”   

SAGE beneficiary households also tend to invest the grant in increasing productivity of farming and agriculture and the establishing small businesses. An elderly woman in Kibiga Sub County stated, “I regularly save a portion of my grant to cover emergencies, cultivation, meeting the basic needs of my household as well as saving to hire day-laborers to open up idle agricultural land”. 20-30% of SAGE beneficiaries regularly invest in agricultural production by buying livestock and other agricultural inputs and hiring ox-ploughs and day-laborers.

While the mobile transfer of government assistance has contributed to the improved welfare of older persons and their families in Uganda, MTN has faced several challenges in the implementation of the SAGE program. Limited infrastructure and lack of a robust mechanism for controlling fraud has been a problem, particularly in Kole, Nebbi and Katakwi. In addition, there are only a few banks for mobile money operators to acquire the necessary floats for SAGE funds. Due to the large number of beneficiaries relative to MTN agents, elderly persons have to sometimes wait longer then anticipated to receive their funds and also face delays in the replacement of lost or faulty SAGE cards. 

Overall, however, the SAGE pilot program, remitting funds through MTN mobile money, has proved to compliment goals of ending hunger and poverty through financial inclusion of the unbanked. For more efficient delivery of services especially in rural areas, the SAGE programme has very good lessons to offer. Mobile money seems to be the most viable way to implement such programs and minimize the bureaucracy of government institutions and the resulting leakages and corruption that are common to many present governments in Africa. 

The views expressed in this blog are not necessarily those of the African Institute for Strategic Research Governance and Development.

For more details, read Julius Okello's Final Report. 

The Socio-economic Lives of Banking Correspondents in India’s Trichy District

By IMTFI Researcher K.V. Nithyananda

Data Collection

To promote financial inclusion in India, the Reserve Bank of India (RBI), in 2006, proposed the Banking Correspondent (BC) model. Under this model, a lead banker is identified in each district to coordinate overall banking activities including the implementation of the BC scheme. Indian Overseas Bank (IOB) is the lead banker in Trichy District of Tamil Nadu, India. Other banks, including State Bank of India (SBI), Indian Bank, Canara Bank, ICICI Bank, HDFC Bank, also take part in the operations of BCs in this district. This post draws from data collected through a combination of a questionnaire as well as open-ended interviews with BCs in Trichy to discuss the acute financial, social and political challenges BCs face and to demonstrate why the RBI needs to seriously re-examine the design of the BC business model in India.   

Demographics and Economic Profiles of Banking Correspondents

43% of the BCs in Trichy were female, while 56% of them were male and included one NGO. Even though the RBI envisioned the scheme to provide part-time earning opportunities for women within a particular village or locality (and also because the microfinance industry catered predominantly to women clients), we found that men dominated BC activities. The woman of the household often acquired the BC license but the male member (husband, father, brother, etc.) would implement the operations on a full-time or a part-time basis. Bank officials reported that in order for BCs to generate revenue, they were authorized to conduct operations in about 3 to 10 villages around their primary village. On average, each BC in Trichy region was managing about 1000 client accounts. This required travel, often at odd times that only men could fulfill due to India’s predominantly patriarchal society. 

Figure 1. Caste Profile of the BCs

The caste profile was the most interesting factor of our study. We found that only 25% were upper caste and the rest were Other Backward Castes (OBC), Scheduled Castes (SC), Muslims and Christians (See Figure 1). Village elders informed us that since BC services were provided to people of all castes at their doorsteps, this meant physically traveling to the segregated localities of Scheduled Castes (SC), Scheduled Tribes (ST), Muslims, and Christians. Social norms however, prohibit upper caste people from going to these localities. In addition, lower caste people were very eager to overcome their economic hardships and were willing to work hard and explore all opportunities available to them. 

For the male BC interviewees, 70% reported that it was their primary economic activity whereas for 82% of female BCs it was their only economic activity. The remaining 25% of male BCs rely predominantly on running their own kirana (grocery) shop or carrying out farming and agriculture, 4% of them depend primarily on their pension for their livelihood, while the remaining 1% are employed with other organizations for primary livelihood. 
Of the remaining 18% female BCs who have alternate sources of income, 16% carry out their own business, which could be in the form of photocopy shop, mobile recharge shop, kirana (grocery) shop, or other economic activities, while 2% work with another organization on a full-time employment and carrying out the BC activities on a part-time basis.

Financial and Economic Welfare Aspects of Banking Correspondent Business

About 70% of BCs were associated with Indian Overseas Bank (IOB), the lead banker for the Trichy region in implementing the financial schemes promoted by the Reserve Bank of India (RBI). We also collected information from other banks like State Bank of India and Canara Bank, but private sector banks like ICICI Bank and HDFC Bank were reluctant to share information about their BC operations. Most BCs had been associated with their institutions only for about 2 – 3 years for two reasons. First, if the BCs found that their organization was not sharing the losses or being helpful in developing clients, there was a habit of leaving and joining other financial institution/service providers. This was the case for many BCs that had shifted out of the State Bank of India. Second, the RBI has now begun pushing this scheme very aggressively and financial institutions only recently became active in implementing it.     

Though the RBI has been promoting the business of BC (also as a means of economic welfare for the BCs), it has not been very remunerative for the BCs. Our sample revealed that each BC was able to earn an average gross revenue of around Rs.7,000 per month. But BCs also incurred all operating costs related to running their business and 79% of the BCs had in fact suffered financial losses. BCs operate on an “Earn while you learn” model where they get training while running the business. As a result most BCs did not yet have a sufficient number of clients who trusted them with their accounts or money. Very few BCs had the large client base needed to make regular profits.

A study conducted by the RBI in 2009, showed that BCs have to make a cash deposit of Rs.5,000. This deposit is collected to ensure that BCs have the necessary permits, to provide access to the technological inputs (including software, machines, etc.), and also to safeguard the bank against possible default by BCs. But our study found that Trichy BCs on average made deposits of around Rs.33,951, significantly higher than the RBI data.  

Figure 2. Financial Health of the BCs

Moreover, BCs invested resources towards premises, laptops, scanners, printers, and other hardware equipment (average of Rs.49,073). Many BCs have invested close to Rs.3,00,000 for setting up of the BC business. Assuming an interest rate of 12% per annum on this investment, a monthly interest charge of Rs.850 is used as notional interest cost in assessing the true financial health of BCs (See Figure 2). 

The data shows that BCs, on an average were incurring losses to the extent of Rs.1800. It is disheartening to note that most BCs have had to cover for these losses themselves, either by borrowing funds or by pledging gold or agricultural property. They invariably used their own funds and also borrowed funds to manage the liquidity in the business. Only 16 out of 143 BCs indicated that the bank or the financial institution made good the losses they suffered by reimbursing their expenses or paying them additional commission. 

BCs also faced other hardships, most of which are generally underestimated by researchers. Some BCs complained that their customers visited at all times, unlike banks that have restricted hours of operation. In such circumstances, BCs would lend from their personal money and go to the client’s place the following day to get the transaction ratified. In some circumstances BCs’ money would get blocked. Many BCs were also banished from their villages by political leaders. At times villagers thought that BCs were stealing the bank’s money. Relationships between local elected officials (Panchayat presidents who are eager to show off their influence in the region and who were often also operating as local money lenders) and BCs (who are obliged to apply the methods and guidelines of their employer in terms of account opening, pension payments, etc.) were also fraught with tensions. There were many instances where BCs were threatened, manhandled, and even beaten up by local elected representatives. 

Concluding Remarks

In many ways, the life of BCs in Trichy district is not what the RBI envisions. They have been made to suffer undue financial hardships; they have been braving threats from local politicians, and also getting a tarnished reputation. In such circumstances, the high turnover of BCs is not surprising. Given this scenario, the financial viability of the business model proposed by the RBI and implemented by the banks needs to be re-examined to avoid a systemic collapse and prevent corruption that could bring disrepute to the entire scheme of BCs, the bank operating the scheme as well as the RBI. 

Read K.V. Nithyananda and Cyril Fouillet's Final Report.

IMTFI Fall 2015 Newsletter

IMTFI Fall 2015 Newsletter is out!

• Read up on all the amazing activities that IMTFI and its researchers are up to: publications, books, presentations, in the media, collaborations, plus more & more research blog posts!

• Announcing the 2015-2016 cohort of research fellows

• Save the Date: Annual Conference April 20-21, 2016

• New IMTFI Money Archive online

Have a read: bit.ly/1YEcJpx

Following Mobile Money in Somaliland

A new research report by Gianluca Iazzolino with the Rift Valley Institute (RVI)

‘This study provides an interesting and unusual insight into the state-building process in Somaliland. Taking Zaad—our everyday companion here in Somaliland—Iazzolino explores the intricate nature of private and public sector relations. Vividly mapping the landscape of the mobile money transfer system, he identifies the importance of trust as its foundation, and the role that banking, financial institutions and technology have played in the making of Somaliland. This report is a recommended reading for policy makers and academics alike.’

-ABDI ZENEBE, IPCS, UNIVERSITY OF HARGEYSA, SOMALILAND




Zaad, Somaliland’s first mobile money platform, was launched in 2009 and has rapidly become a feature of a financial landscape hitherto dominated by Somali remittance companies. This report charts the distribution of mobile money across the financial landscape of Somaliland. It examines the way the Zaad service is reshaping livelihoods and business practices, as well as implications of its popularity for the relationship between state and non-state actors, and the effect this might have on Somaliland’s political and financial institutions. It argues that the narrative of the role that mobile systems can have in supporting financial inclusion runs the risk of obscuring complex political and economic dynamics, especially in the context of Somaliland’s state-building process. The study suggests that the popularity of Zaad is in part due to the specific context in which it operates as well as the business model and outreach strategy of its parent company Telesom. Fundamentally, in the absence of international banks, Zaad meets a widespread demand to help people cope with a volatile economic situation.

Download the full report at the Rift Valley Forum here.

Mobile Money Utility & Financial Inclusion: Insights from Unbanked Poor End-Users in Nigeria and Ghana

by Lite J. Nartey and Olayinka David-West

Cross-section of Nigerian focus group

Mobile money is a unique service comprising the convergence of two industries—banking and telecommunications. Still in its nascent stages, the industry is making a significant impact on financial inclusion and transforming the lives of the poor. Indeed, mobile money “represents the biggest opportunity to increase financial inclusion in emerging markets” (GSMA MMU Annual Report 2012). There is, however, more room for penetration and access of mobile money globally. Access to financial services (financial transactions, credit, savings etc.) is important for individuals to financially manage, structure and plan livelihoods for themselves and their families. It is worth noting that 50% of adults worldwide (more than 2.5 billion people) do not have access to formal banking services, and 59% of adults in developing economies are unbanked poor (Demirguc-Kunt and Klapper, 2012).

Mobile money as a solution for financial inclusion has been relatively successful in East African countries like Kenya and Tanzania. The project titled “Mobile Money Utility and Financial Inclusion: Insights from Unbanked Poor End-Users”, examined Western African practices—Ghana and Nigeria in particular. This mixed-methods study examined mobile money utility, the understanding of the products offered to the poor and how these products are utilized. From talking to mobile money providers and other researchers, we understood the range of services provided. The consumer study, comprising of focus group discussions and surveys highlighted the utility of mobile communications and financial services (savings, contributions, mobile money) by the unbanked poor in Ghana and Nigeria. The telecommunications growth in sub-Saharan Africa has significantly improved access to mobile telephony; teledensity estimates exceed 100 percent in both Ghana and Nigeria. However, our findings reveal that mobile money services have been developed around formal services and hence adoption is relatively low amongst the financially excluded.

Mobile Money Utility in Nigeria

Cross-section of Nigerian focus group

In Nigeria, banks and informal groups are providing financial services like money transfers, savings, and contributions that are commonly found economic practices amongst the poor. Mobile phones are  primarily utilized for basic telephony—voice calls and short message service (SMS). The convergence of voice, data and media that has led to the growth and popularity of smartphones is evident in the growing number of mobile data services such as Internet browsing and messaging. However, utility of mobiles for financial services is still very low.

In spite of the high institutional trust of both banks and telcos and perceived convenience, mobile money adoption is inhibited by factors such as low knowledge of operational protocols and product/services, network quality, and trust. Key improvement areas for Nigerians were service delivery and market development.

Ghana

Microfinance institutions, savings & loans companies, and cooperative/ joint saving schemes provide savings products in Ghana popularly known as “Susu.” Even with high levels of ownership, mobile phones are predominantly used for voice and SMS with data-oriented services trailing.  

In Ghana unlike the case in Nigeria, knowledge and adoption of mobile money appears significantly higher in insurance products and money transfer. However, inhibiting factors include transaction costs, agent/customer/merchant disputes or issues, and network quality.

Whilst Ghanaian respondents perceived telcos as more trustworthy than banks, areas of improvement included the extension of services supported on the platform. Mobile money improvement areas in the two countries under observation appear to be somewhat contradictory. Nigerians are desirous of enhanced service-delivery through more accessible channels and market development while Ghanaians seek service extensions derived from innovation.Whilst person-to-person remittances are well supported, complementary services that the customers value vary. In Ghana, for example, where telecommunications companies are licensed to provide mobile money operations, complementary services such as ATM withdrawal are not as prevalent as in Nigeria that operates on bank-led or independent consortia models. These models warrant different strategies and institutional processes to enhance value proposition, market development & education, and distribution. As such regulatory licensing models are important considerations for mobile money development and growth.

Results 

The key insights drawn from these two West African countries are summarized below.

• Firstly, awareness in Nigeria is somewhat lower than Ghana despite the former having more providers. The notion voiced by one of the members of the focus group participants that mobile money is for the rich may be indicative of inadequate communications.

Figure 1: Expression of mobile money curiosity from Ghanaian non-users

• Secondly, access limitations were evident in both countries where the lion’s share of consumer transactions are conducted in open (informal) markets using cash. The expanse of the mobile money ecosystem is evident in the exclusion of the open markets tradesmen, transportation providers, hawkers, and other informal services that are utilized by a large proportion of the population may explain the low adoption rates. These adoption rates are particularly low in Nigeria (3 percent adoption amongst survey participants), a country promoting Cashless and Financial Inclusion Strategies.

Figure 2: Nigeria-Perceived Usefulness of Mobile Money 

Figure 3:Ghana-Perceived Usefulness of Mobile Money

• Finally, the financial nature of mobile money transactions mandates higher levels of trust, especially amongst the unbanked poor. In spite of the institutional trust ascribed to both telecommunications operators and banks in both the countries, network quality and sustained functionality undermines the entire service.

Conclusion

Key mobile money insights from unbanked poor users in Ghana and Nigeria suggest that providers of these services need enhanced strategies in the following areas: awareness/communications, adoption, and trust. The service expansions sought by Ghanaian respondents warrant ecosystem development supported by a more open and inclusive platform. In all, the most crucial strategy will be the substitution of mobile money for cash in open markets where the majority of the population trade.

--

GSMA (2012). Mobile Money for the Unbanked poor, Annual Report, 2012, pg. 2

Demirguc-Kunt, Asli and Leora Klapper, 2012, “Measuring Financial Inclusion: The Global Findex Database,” World Bank Policy Research Paper 6025.

View the full report here.

The promise of Islamic finance – user experiences, product innovation, and the potential for poverty alleviation

Cross-post from the Impatient Optimists Blog featuring a report that offers an introduction to the theological tenets of Islamic (micro)finance, a description of the most common products and services, and a global overview of the industry and its major institutions using an anthropological perspective by Bridget Kustin.

An Islamic microfinance collective gathers for its weekly repayment meeting (Chittagong Division, Bangladesh, 2010)

"The inherent social justice potential of Islamic economics is a rich and underutilized resource for poverty alleviation. Currently, Islamic microfinance is poised to grow the market of Islamic banking and finance (IBF) by steering poor populations into formal financial activity. Expanding the reach and profile of Islamic microfinance through partnerships and funding strategies can help meet the financial needs of the poor—and help the global IBF industry better embody motivations for Islamic economic activity in the teachings of the Qur’an and Sunnah. In this context, Islamic microfinance holds tremendous potential to tap into often-scattered Islamic donor streams – zakat, sadaqat, and waqf – and channel them toward strategic, impact-oriented goals.

To better understand Islamic microfinance and the role it can play, the report explains the importance of examining cultural contexts as well as accounting practices for indicators and metrics. The anthropological perspective of the report investigates how financial tools come to life in the hands of clients and allows for more nuanced, complex understandings of user experiences through a methodology of “participant-observation,” repeat minimally-structured interviews, and relationship-building. The report also offers historical and theological background, overviews of Islamic financial products, summaries of key countries and institutions, and in-depth examinations of Islamic (micro)finance landscapes in Bangladesh, Indonesia, and Pakistan. Close ethnographic attention has been given to the unique challenges faced by female clients and female-headed households, implications of client relationships with field officers, and the absence of tools for clients to address personal accounting and calculation challenges. The report also offers starting points for digital interventions to meet the needs of the poor while addressing longstanding inefficiencies in Islamic (micro) finance."

Click here to read the full blog post on Impatient Optimists.

For the full report, "Islamic (Micro)Finance: Culture, Context, Promise, Challenges"

Read about Bridget's IMTFI-funded research:

Blogpost #1: "Mobilizing Religion as Value Storage: Islamic Microfinance in Bangladesh as a Model for Poverty Alleviation (Part I). Research Questions and the ‘Islam’ of Islamic Microfinance"

Blogpost #2: "Mobilizing Religion as Value Storage: Islamic Microfinance in Bangladesh as a Model for Poverty Alleviation (Part II). Financial Vocabularies, Accounting and Calculation"

Mobilizing Religion as Value Storage: Islamic Microfinance in Bangladesh as a Model for Poverty Alleviation (Part II)

By IMTFI Researcher Bridget Kustin

PART TWO: Financial Vocabularies, Accounting and Calculation 

In my first post, I introduced my IMTFI-funded research into the Islami Bank Bangladesh Limited (IBBL) and its Islamic microfinance program for the rural poor, the Rural Development Scheme (RDS). I explored the slippages between institutional (here the IBBL) versus client understandings of the ‘Islam’ of Islamic microfinance. In this posting, I continue the discussion by addressing how a financial institution might not know its client because it does not fully grasp the assumptions and possibilities contained in clients’ financial vocabularies and their accounting and calculation practices in space and time. 

Children's clothes purchased for Eid ul Fitr are displayed;
social pressures make Ramadan and Eid periods of financial insecurity (2014).

Financial Vocabularies

Money was an omnipresent topic of discussion in the small town/rural slum community of Zinukpara, although conventional economic definitions for money categories and instruments (e.g. assets, investments, debt, and income) were not necessarily applicable. Material objects, relationships, or affects usually indexed by such definitions can be mobilized differently. For example, labh means ‘profit’ as well as ‘benefit.’ Clients might discuss the labh of an investment, debt, loan, or purchase in numerical or in social, religious, or emotional terms; certain transactions could never fit neatly onto a household profit-loss statement, if such a ledger were to exist. In another basic expression of money-usage in the context of debts and expenditures, taka (money) and shudh (interest) can be ‘eaten’ (khaowa, to eat), indicating irreversible, definitive usage, for instance:

• Ex. 1, Client to RDS field officer: If you give us less money [than what we ask for], what do you expect? .... I will eat the money [khai felayun].

• Ex. 2, RDS field officer to client: So you took the money, kept it at your house, and ate it? [khi feladay].

• Ex. 3, Client to Bridget, explaining how RDS works: “We take [their] money for a year. We don’t eat their money. Of course we all make payments. It’s not good to create hardship [for the bank], that’s what everyone says.”

• Ex. 4, Client asking the RDS field officer to accept a late repayment: You have to understand. If you do business, every day cannot be the same. But we have to give the [RDS] installment from the [business] labh [profit]. You are also a human being…you have to understand: if you have a stomach, you have to give to the stomach, and we also have to give to the stomach [pet’e to diaya foribo, onera o diya foribo]. And you have to give to someone else as well. 

Here, implicating the body frames money and interest not as ‘things’ to be taken (naowa), held (rakha, haowa), or used (babohar kora, kora), but a part of more intimate, embodied and irreversible actions entwined with the basics of sustaining life. This gestures toward the condition of poverty in which money is not necessarily a neutral medium of exchange with fungible choice in its applications, but is the medium of enabling sustenance and survival. In the third example, the counterposition of ‘taking’ versus ‘eating’ RDS funds distinguishes money that once used is gone forever and cannot be recouped or repaid from money that can be repaid. In the first example, the client explains to the field officer the difficulty in receiving RDS microfinancing that is less than the desired amount: the lower sum will be eaten and not repaid, as the amount was never enough to execute the desired income-generating venture in the first place. For this client, eating the money is part pragmatism and part punitive, as the bank should not expect to receive its money back if it is unresponsive to client needs.

This is not a question of reconfiguring ‘eaten’ money into outstanding debt or write-off-as-gift. Rather, “eaten money” exists as its own category — both as a kind of necessity, and a kind of wastage. Not all money is meant to be repaid, although this determination is made by the recipient and so is pointedly asymmetrical. Eaten money can carry its own costs, such as reputation, trustworthiness, or the ability to secure funds again from the eaten funds source. A household ledger bifurcated into incomes and expenses cannot contain this third, mutable category. 

Accounting and calculation 

Women are not necessarily the primary managers of their household accounts and RDS repayment obligations. Ameena, the leader of her RDS collective, keeps track of everyone’s debts through memory, and negotiates late payments with the field officer. As a result, managing very small amounts of weekly repayment and contributions into mandatory savings accounts — from about 0.60 USD to 4 USD — requires significant labor on the part of Ameena and the field officer. 

Part of what adds time to client-field officer encounters is the inaccessibility of calculative mathematics for clients, often compounded by the scarcity of written financial records. This is despite the fact that increasingly complex financial inclusion-oriented products require calculative mathematical ability on the part of the client, in order for the client to have a clearer picture of her obligations, assets, and financial status in time. Clients rarely use the calculators available on mobile phones as they use Arabic numerals rather than Bengali numbers. During the daytime repayment meetings, children who might otherwise be able to help with sums are typically at school or working. 

Sums and counting are performed verbally and often collectively, and the cardinal and ordinal numbering of time frames (whether weeks, months, or years) are situated against other measurements of the passage of time. These include the six Bengali seasons; events on the Islamic calendar, namely, Eid ul Fitr, Eid ul Adha, Shab-e-Barat, and Ramadan; and events such as a hospital stay, marriage, or child’s birth. 

A client passbook and bank ledger, detailing RDS accounts (2013)

Positioning myself within the community in the register of ‘participant observer’ meant engaging in a broad spectrum of relations, including the informal money-lending ubiquitous between relatives and neighbors. My own monthly financial inflows and outflows were likewise subject to daily discussion. This served to insert me into a household’s financial management processes. Thus, rather than recording a singular ‘true’ quantitative weekly or monthly accounting that existed in static form, our interviews captured the dynamic work of financial management as it took place within performative and technical acts of negotiations, diversions, bundling, and forestalling.  

The RDS passbook (2013)

In addition, when the women discussed their debts, three figures were usually cited with regard to the money owed: first, the original, principal amount owed. Second, the lender’s labh (profit), typically the interest amount. Finally, the lowest possible total amount that could be paid while still achieving closure of the debt. One rhetorical formulation I often heard encapsulates this latter notion: “if I owe 1,000 and pay 900, I still won’t get it” – with ‘it’ referring to the settlement or closure of a debt. 

Financial services offered by formal institutions are not set up to account for these processes. Similarly, conventional notions of household financial accounting that set debts/expenses against regular inflows are not applicable. Rather, these processes gesture toward a household ‘account’ as a shifting, multi-plane ledger where debt amounts (subdivided into principal and interest) are set against the lowest possible amount one can anticipate, strategize, or hope to pay, by leveraging time, external shocks (for either the borrower or lender), religious compassion, or other social or familial factors. The marginal gains from such reductions (and, on a related note, a consistent preference for round numbers and strategic rounding up or down to benefit the individual most in need) become part of broader financial management strategies in time. Loans exist as imminently repackageable into different sets of obligations — an enticement to a gold seller to bring one’s relatives to the shop, assurance to a shopkeeper that your business will stay with his store, appeals to an RDS field officer’s sense of Islamic piety and compassion for the poor.

Ultimately, my field research asks what it might look for an Islamic microfinance institution to take seriously the idea of people participating in microfinance, rather than just being subjects of it. This question then can be understood on multiple registers, from the socio-linguistics of financial vocabularies to technical aspects of calculation and record-keeping. And to ways in which Islamic notions about poverty, compassion, and social justice in economic affairs frame client relationships to the institution. 

Further readings:
-Part I of the blog, "Mobilizing Religion as Value Storage: Islamic Microfinance in Bangladesh as a Model for Poverty Alleviation". 

-Bridget Kustin's full Final Report 

-Islamic (Micro)finance: Culture, Context, Promise, Challenges, a report by Bridget Kustin for Financial Services for the Poor, Bill and Melinda Gates Foundation. The report offers an introduction to the theological tenets of Islamic (micro)finance, a description of the most common products and services, and a global overview of the industry and its major institutions.