Special PERSPECTIVES Series on Demonetization in India: The dangerous liaisons between demonetization and the Indian informal economy (Part 1)

In IMTFI's PERSPECTIVES blog series, IMTFI fellows take on the recent demonetization move in India. This series aims to foster an open dialogue on issues around money, technology and financial inclusion for the world’s poor. Individual contributions reflect contributors' own reflections on recent events - based on their research and areas of expertise. The topic of demonetization will conclude with a curated commentary by IMTFI on key themes, important questions, and what we can learn from these contributions for digital financial inclusion going forward. 

By IMTFI Fellows Isabelle Guérin, Santosh Kumar and G Venkatasubramanian

Queue in front of ATM in Chennai, January 2017
(photo credit: Santosh Kumar)

It is now clear that a major objective of last November's demonetization initiative was to promote a cashless economy in a bid to formalize the economy, a large part of which escapes any form of taxation. This argument was very clearly made by Prime Minister Narendra Modi in his official speech of December 251. He claimed that bancarisation2 and digitizing payments would primarily benefit the poor, since it would end "labor exploitation" and give the poor better access to various benefits such as health insurance. Many reasonable doubts can be raised regarding such claims, starting with technical barriers to implementation (inadequate payment infrastructure, poor connectivity and access to power, etc.). Our field observations over the past decade in various parts of North and Coastal Tamil Nadu help shed light on another cause for doubt: widespread distrust of banking and digital transactions (although there are distinctions between the two). Our ongoing fieldwork, which has focused on how ordinary villagers have been handling demonetization over the past two months, widely confirms this. The first part of this blog post discusses resistance to bancarisation. The second part questions the links between digitization and formalization.

Many villagers engage in resistance to bancarisation, with good reasons. In the wake of various measures and governmental schemes over the last decade, the bancarisation of Indian citizens has made significant progress but remains largely incomplete. In our field area, almost all households have a bank account but many don’t use them, or only do so to channel their welfare benefits (which is the reason for the mass opening of bank accounts). Villagers are distrustful of bankers - who are unwelcoming to the mass of illiterate clients - and rely on other means to save. Gold purchases, informal loans and reciprocal gifts (mostly through ceremonial exchanges) continue to be the most popular way to save and protect against the knocks of daily life. As State social protection is almost non-existent, family and friend support networks for times of need continue to be the most important protection and means to plan for the future. Any monetary surplus is injected into this network through gifts or loans. Freezing wealth in a bank account makes little sense, barring the willingness to cut oneself off from one’s social surroundings. Demonetization, and banks’ inability to provide cash3 has further heightened mistrust. Apparently the few people who have a cash surplus are still unwilling to entrust it to banks (which in turn worsens bank liquidity shortages).

Queue in front of ATM in Chennai, January 2016
(photo credit: Santosh Kumar)

Conversely, interpersonal relationship networks have partially helped to mitigate the drawbacks of demonetization. Since November 8, in our areas of fieldwork, some sectors such as the construction industry have been paralyzed. But many economic transactions have been continued on the basis of mutual trust and credit through deferred payments of wages and consumer good purchases. Shopkeepers were already used to selling on credit, which is a major source of client loyalty. Most have considerably extended repayment periods, and in turn enjoy credit facilities from their wholesalers. We encountered households who hadn't paid their shopkeeper for the past two months. Various arrangements have been made for wages, often combining payment in kind (for instance rice for landowners, free meals for restaurants) and delayed payments. Workers have little choice, but some view delayed payment as “forced savings.”Some financial circuits have stopped. For instance, door-to-door moneylenders have stopped collecting repayments and are waiting before disbursing new loans. The same goes for many microfinance organisations. Some have been offering cashless loans (wire transfer) but with little success so far. Women (the main clients) are afraid they won’t get their cash. And we indeed came across instances of banks (who are themselves running out of cash) refusing to disburse microcredit loans and giving priority to savers. Chit funds (local ROSCAs4) have been at a halt for a while and are slowly starting up again. At the same time, the lucky ones who are managing to get cash are regularly5 lending it to others.

Ceremonial transactions, which make up a large share of households’ expenses, particularly marriages at this time of the year, have also involved various informal arrangements. Some events have been cancelled, often with serious consequences for the reputation of the family. Events that have gone ahead have often been scaled down (for instance, having the wedding at home instead of renting a hall) but multiple chains of debt have allowed the event to take place. Instead of bringing the traditional cash – gifts represent a major source of funding – guests simply give a pledge document to be honored once cash becomes available. Others promise to give more at the next ceremony. Social relations are truly being put to the test. Merchants or service providers, be it for catering, jewelry, saris, music, photography, or film, are agreeing to be paid later if they are able to afford it. Ceremonial organizers are borrowing from financial companies and negotiating for direct wire transfers to merchants and providers (and will themselves pay back later in cash).

When the old notes were still in circulation, debt was increasing simply because people with a cash surplus were desperately trying to get rid of their old notes and lending to anyone interested. This led to a significant drop in interest rates (by half in the places we visited). Credit markets remain highly segmented, however. In places where borrowers desperately need cash, interest rates have shot up (see below). It is also worth noting that beyond a few service providers such as hospitals6, which were authorized to accept old denominations until mid-December, many other traders have continued to do so illegally, such as jewelers, currency exchange offices, alcohol retailers, etc., most often for a commission (up to 20% in the cases we came across).

Queue in front of ATM in Chennai, January 2016
(photo credit: Santosh Kumar)

As usual, these kinds of informal arrangements also have a dark side. Intermediaries have sprouted up, offering high-cost services to queue at ATMs, deposit cash at bank branches, exchange the 2000 INR notes nobody wants, or simply to advance cash. Intermediaries are often to be found at pesticide shops, petrol stations, pharmacies, hospitals, and taxation departments. We also came across unscrupulous employers offering large advance payments to their workers in old denominations. Some accepted them, and have been struggling to get rid of these invalid banknotes. When the advance is for seasonal work that will start later in the year, some workers have cleverly accepted but with the deliberate intention of not turning up, arguing that the money they received has no value, and even though they have been able to use part of it. Some have refused for ethical reasons: they don’t want to be complicit in the whitening of black money. The strength of the rural poor's political awareness and commitment to the fight against corruption is astonishing. It is striking how much ordinary people have been affected by the demonetization and at the same time have support for it. But once citizens realize that it is merely an illusion7, the disappointment is likely to be bitter.

In short, far from fighting it, demonetization has mostly caused a boom in the informal economy. What will happen in the future is of course a key question that we discuss in the second part of this blog post.

Read more about Isabelle Guérin, Santosh Kumar and G Venkatasubramanian IMTFI research here

Notes

1. http://www.narendramodi.in/pm-modi-s-mann-ki-baat-25th-december-2016-533606
2. Bancarisation refers here to efforts to include the unbanked in formal banking circuits and improve access to financial services. 
3. In urban areas in Tamil Nadu it seems that bank activities are slowly returning to normal. In rural areas, banks are still facing very serious liquidity shortages. As of early January, it is still common to see several hundred people queuing in front of a branch, from 8 in the morning and without any guarantee of getting cash. 
4. ROSCAS are rotating savings and credit associations.
5. This is the case for civil servants, who are usually paid by cheque or wire transfer. In the wake of several public demonstrations, public administrations have organised cash payments for their staff. 
6. Petrol stations, highway tollgates and government cooperative stores have also been authorised to do so. 
7. Much black income is invested through gold and real estate. Fighting its cash component – which is less than 3% of the total black income according to certain estimates – would fail to eradicate the core of the problem, namely the generation of black income. See for instance http://www.caravanmagazine.in/vantage/demonetisation-arun-kumar-economist-black-money. 

Special PERSPECTIVES Series on Demonetization in India: The Recent Indian Demonetisation and Cash Exclusion

In IMTFI's PERSPECTIVES blog series, IMTFI fellows take on the recent demonetization move in India. This series aims to foster an open dialogue on issues around money, technology and financial inclusion for the world’s poor. Individual contributions reflect contributors' own reflections on recent events - based on their research and areas of expertise. The topic of demonetization will conclude with a curated commentary by IMTFI on key themes, important questions, and what we can learn from these contributions for digital financial inclusion going forward. 

By IMTFI Fellow Debashis Acharya (School of Economics, University of Hyderabad)

Source: The Hindu Business Line (Nov 13, 2016)

In the early hours of November 9, 2016 as the acting finance officer of the University of Hyderabad, I got a call from a faculty colleague on the possible ways to disburse payments to a group of conference participants. The difficulty arose since INR 500 and INR 1000 notes (bills) had ceased to be legal tender following an announcement by the Prime Minister Mr. Narendra Modi. I quickly updated myself by reading the Times of India and also by speaking to the bank manager on campus. The banks had been directed to exchange old notes against new ones and set withdrawal limits (these are set from time to time). On the first day, the bankers seemed ready and confident to handle the demand for note exchanges and withdrawals. I confirmed this by calling up a banker friend handling a branch in a suburban area. To quote him, “We have received Rs1 crore worth cash of smaller denominations last evening. Though the whole move has come as a surprise we will be able to meet the cash demand." As days passed, the ATMS dried up and I could see long queues outside the branches of different banks and ATMs.

As I casually surveyed these queues, I tried not to restrict my analysis to the macro implications of demonetisation like my fellow economists. Some economists in India termed Mr. Modi’s idea of tracking down black money through this demonetisation move as a meaningless exercise and some opined that the exercise might be partially effective. The media started highlighting possible ways of laundering black money following this demonetisation announcement. As an IMTFI fellow working on cashless payment modes and prepaid cards, I started thinking more on our behavior in general and that of the rural folks in particular. The financial inclusion efforts in India have been working to ensure that everyone has a bank account and a debit card to begin with. Experiments on technology-enabled financial services and payment modes like mobile phones, wallets, prepaid cards are at different stages. How can one best describe the current situation? In my view, it is probably a transitory cash exclusion rather than financial exclusion due to demonetisation.

Irrespective of income levels, everyone depends on cash to some extent or the other. The non-cash payment technology has penetrated each and every corner of the country with reasonable awareness of mobiles, wallets, and cards. Despite the printing press working probably 24 hours to supply cash to regional vaults, there seems to be a fear of shortage among people. This fear is certainly not cutting across society equally with urban lower and middle classes among the most impacted. This has led to hoarding of cash, i.e. of new notes as well as old notes of lower denomination, which has for a while been adding to the cash crunch.  As reported by the Financial Express on Nov 14, 2016, “to mitigate their hardship the Reserve Bank of India has already sent new currency notes to banks and ATMs in Jharkhand’s Bokaro by helicopters.” The report also quoted the Economic Affairs Secretary Shaktikanta Das, who said, “…it was decided to activate all channels for dispensing cash. With regard to rural areas, he said that the cash holding limit for 1.2 lakh banking correspondents (BCs) has been increased to Rs 50,000 and banks have been given flexibility to increase this limit on a case by case basis. It has been also decided to provide cash multiple times to the BCs so that the rural population is served. Besides, the supply of cash to 1.3 lakh branch post offices would be enhanced so that the public can get banknotes.”

However, the long queues seen in bank branches and ATMs in the first two weeks post demonetization may not be entirely due to the day-to-day transaction demand for cash. It’s rather a precautionary motive to hoard extra cash to avoid this transitory uncertainty. Such hoarding behavior may differ from one region to the other. I visited a relatively poorer state of India, Odisha, during Nov 9-10 and again during Nov20-24. I didn’t see any panicking crowd before ATMs and branches. The situation seemed to be quite normal. I did some intercept interviews on my way there with cab drivers and street vendors. I learned that the prices in some sectors, especially perishables including say fish, might have come down but that the whole move has been taken very positively by the public as a surgical strike on black money. The rest is all adjustment cost and a passing phase.

The perceived cash crisis has paved ways for mobile based payment apps, wallets, etc. to earn quick wins by offering discounts and luring customers to use these apps for making payments. The Modi government has declared several standard operating procedures to encourage digital payments such as reducing transaction fees for digital payments in general and waiving such fees for specific transactions. Digital/Mobile money seems to be taking off with operators like PayTM, Freecharge, and Mobikwik gaining higher market share and confidence of people, especially in urban areas. A policy-induced move towards digital payments has turned into a crisis-induced move in today’s digital India. So far, digital payments and remittances including mobile money, wallets, use of POS machines etc., have been promotional in nature as providers including government, banks, and the financial sector have worked to attract people to the benefits of these modes. This is policy induced. People adopt these modes when they are convinced of the benefits they derive from them. The perceived and actual benefits include lower transaction costs, safety, utility in making payments, and liquidity, to name the major ones. The uptake has largely depended on these factors from supply and demand sides. But since demonetization began, a sort of crisis for some, everyone is now compelled to resort to these digital modes as far as possible. In the process, then, new segments of the population are now also learning the benefits of these digital payment solutions. For instance, an Indian television advertisement shows a son pleasing his father by making utility payments from his mobile within seconds. Now, the father is inquisitive about this payment mode and follows all the advertisements in television, newspapers, and the radio. All providers have come up with their apps/solutions to attract customers. In my view, this is a crisis-induced move towards making India digitally and financially inclusive.
     

Source: Mint E-paper Dec 29, 2016

As I read the national daily today I am reminded of my pre-paid card project on insurance payments in Varanasi. In Hyderabad, the city where I live, the State Bank of Hyderabad in the city  ordered about 3 lakh pre-paid cards to distribute to both customers and non-customers(reports Times of India on Dec 12, 2016). Luxury spending has been reduced and people have started using the cards for very small transactions such as purchasing groceries, daily essentials and fuel. These cards would work like mobile recharge for amounts of INR 50/- and below. The customers can add funds either by directly paying to banks or by adding funds online.

I also recall my research in rural Varanasi, my field site for the IMTFI project. At the time of the study, respondents were in many cases skeptical about new crisp banknotes but fine with the old well-worn or soiled notes dispensed by the ATMs because they felt these notes were trustworthy (not counterfeit). They were proud to have possessed a debit card or a pre-paid card to receive their payments and to store liquidity for a while. This was to avoid theft of cash at home or some relative requesting to borrow some cash. It was also partly to earn a little interest on such cash parked at a bank. I remember a respondent showing me a loan pass book of a different micro finance company, where some cash was ploughed back with loan repayments for some interest in return. It’s all about price and non-price convenience that these respondents derive by parting with cash but not entirely with liquidity. The interest rate being the price of money or the opportunity cost of holding cash, respondents derived price convenience by earning a little interest. The non-price convenience refers to the absence of theft, of the need to lend a family member some cash, of the burden of hiding cash in a tiny spice container in the kitchen.

How might my respondents feel now? They may not understand the big word, “demonetisation.” They may face a shortage of cash for their daily needs. Because they always preferred soiled currencies of denominations below INR 1000, I guess they will doubt more the new flashy notes of INR 2000 and INR 500 denominations dispensed either at ATMs or over the bank counters. But it’s also true that even the educated mass used to suspect the genuineness of INR 1000 notes since before demonetization these were found to be fake on a number of occasions. Rural respondents at my field site may face a temporary slowdown in their small/petty business - a kind of local deflation, I would say. Prices of the goods they sell may plummet for a few weeks until they get currency at hand and start believing that these new currency notes are genuine.

A step forward in access to and availability of expanded digital payment infrastructures might help rural folks. They should be able to receive and make payments using either a pre-paid card or a mobile. All may not have bank accounts. The provider of cards or mobile based solutions should be able to handle both types of rural folks i.e., with or without bank accounts. At best, my respondents may likely be indifferent to this demonetisation given their beliefs that new high denomination currency notes may not be genuine and their largely low volume of daily cash transactions. I am sure they will be better off going beyond cash, as envisioned by Prime Minister Modi. I will have to visit my field again to learn more from my motivated respondents, the clients of Utkarsh Micro finance limited, which is in transition to a small finance bank.

A short queue in an ATM in Lingampally,
 Hyderabad on Jan 4, 2017 (photo by author)

In this first weekend of January I am happy to see the shorter queues before the ATMs and bank branches in Hyderabad. The long pending demand for INR 500 notes has been met now. The recalibrated ATMs have been dispensing INR500 notes for the last two days. The ATM withdrawal limits are now revised to INR 4500 per day. This is going to curb the hoarding of cash and the hoarding of small denomination notes (the “chillar” in local language). But the digital inertia may turn into a big leap towards a cashless Indian economy. The print and electronic media are out with advertisements to this effect on a daily basis.

To sum up, this move by Mr. Modi, though originally aimed at curbing black money and increasing tax collections, has now become a crisis-led digital-financial inclusion drive. This has acted as a positive shock and game changer in instilling confidence among the lower strata to go digital. However, the success and sustainability of this move depends on the supporting infrastructure, both technological and financial. Needless to emphasize that the financial service providers in this digital payment segment have turned this cash crisis into an opportunity to scale up their technology-led payment services and products. But the occasional reporting on frauds and cyber-attacks in the media has the potential to discourage people from using digital modes of payment, including internet banking. The net result will depend on how the financial system faces these challenges. I will have to wait for numbers about uptake of digital payment services and on incidents of fraud to have further evidence, aspects of which I will address in an upcoming post on model cashless villages around Hyderabad, similar to the subject of my IMTFI study in Varanasi, Uttar Pradesh.


Read more about Debashis Acharya's IMTFI research here

Special PERSPECTIVES Series on Demonetization in India: Demonetization and its Discontents

In IMTFI's PERSPECTIVES blog series, IMTFI fellows take on the recent demonetization move in India. This series aims to foster an open dialogue on issues around money, technology and financial inclusion for the world’s poor. Individual contributions reflect contributors' own reflections on recent events - based on their research and areas of expertise. The topic of demonetization will conclude with a curated commentary by IMTFI on key themes, important questions, and what we can learn from these contributions for digital financial inclusion going forward. 

By IMTFI Fellow Janaki Srinivasan

A popular whatspp image that started circulating soon after the demonetisation announcement

Demonetization. A term most people in India had never encountered before November 8 last year, today dominates newspaper headlines, electronic media discussions and everyday conversations in the marketplace alike. (There are even short forms for it! My favourite? Demon!). Several aspects of demonetization have been extensively analyzed, including the legality of its adoption and declaration, and the repercussions of this move for the credibility of the Indian central bank, besides its short and long-term implications for the everyday transactions of various sectors (especially the ‘informal’ and digital payments companies) and the overall economy. 

IMTFI researchers will recognize from their own work across the globe the importance of several of these dimensions in shaping people’s monetary and spending practices (Indeed, in our own research, my co-PI Elisa Oreglia emphasizes the link between abrupt shifts in monetary policies, including demonetization without convertibility, in Myanmar and people’s lack of faith in banks and in currency as well as the practice of saving in gold prevalent in the country). One aspect that several of our research projects have gone on to highlight is the diversity of such practices. What I want to talk about here is the disconnect between this diversity on the ground, on the one hand, and the universalizing terms and concepts we are seeing employed to present the vision and rhetoric of demonetization in India, on the other. I am especially concerned with the implications of this disconnect for financial inclusion (and exclusion).

Take the idea of ‘black money’, for example, whose elimination was among the first rationales offered for the demonetization move in India. As economists and policy analysts have now been pointing out, ‘black money’ is many things. If corruption is the ultimate target, cash might well be the wrong place to look for ‘black’ wealth, which is more likely to be in the form of real estate or gold, and in circulation rather than stashed at home. Moreover, in its passage from personal stashes to the bank, ‘black’ wealth is often converted to white with the help of brokers of various kinds, thereby challenging the association between demonetization and the elimination of illegally obtained cash. Meanwhile, if ‘black money’ includes all unrecorded transactions (transactions in cash without a bill, money that is not in bank accounts etc.), this quite often encompasses cash that is legally earned but that individuals may wish to keep hidden for a variety of reasons unconnected to corruption. IMTFI researchers and many others working on the practices involved in monetary transactions have pointed to the many ways in which people choose to keep their cash at home because they may not trust banks, or because they may wish to save money away from the eyes of their family or community members (see here for Tara Nair’s discussion from our Nov 11, 2016 financial inclusion workshop on the repercussions of demonetization on women’s small savings in cash). Given the variety of reasons that motivate people to record transactions or to keep them hidden, it is safe to say that a policy conflating all these motivations and types of holdings into a single category of ‘black money,’ and attempting to wipe ‘it’ out, will cause deep distress to large sections of the population.

Photo credit: Janaki Srinivasan

Another rationale for demonetization that came a few days after the official announcement was the need to move towards cashlessness. Like ‘black money,’ ‘cashless’ is a baggy term. People did in fact go cashless in the aftermath of the demonetization – but perhaps in ways that the policy makers had not quite imagined! There were stories of people going back to a barter system in some regions. Several neighborhood shops – and a snack shop at the place I work – started creating credit registers for their customers, agreeing to be paid once normalcy returned. But, of course, neither of these approached the desirable state of cashlessness that was being advocated. One of the perceived benefits of going cashless was the lower transaction costs of using digital money compared to paper currency. However, in light of the demonetization, we have been seeing how several kinds of transaction costs are encountered in going cashless using digital money too. 

Again, this is (especially) not news to IMTFI researchers: questions of literacy, digital literacy, the cost of devices that can handle digital money transactions, regulation limits on such transactions etc. are all reasons that make cashlessness costly for many potential users (in addition to the many hurdles currently being faced because of the transition and inadequate physical infrastructure). These costs vary drastically by the point of transaction and volumes. We have been reading that small scale businesses and street vendors, for example, that are customer facing, have few personnel, and operate on low value transactions are struggling to deal with the time and monetary costs of operating through a PoS machine or an app such as Paytm for every customer (especially since they often have to deal with several such customers at the same time).

Paytm deals appear on my mobile everyday now 

Finally, I want to point out the binary of cash and digital that has become prominent post demonetization: you are either for cashlessness or a supporter of cash. Cash is messy, costly, and for those who don’t know any better. This binary thinking, I argue, takes away the flexibility that I once thought digital platforms offered me. Prior to demonetization, the growth of digital money was very slow in India despite the presence of payment platforms for some time. In fact, in my IMTFI research, I was hard pressed to find vendors or users of digital money in the Kerala fishing town I was studying back in May 2016. Within the often tough circumstances of people’s lives, the decision to use cash over digital payment platforms indicated some limited amount of choice that people exercised in the context of their economic transactions. Whether because they didn’t have access to mobile devices, or because they were uncomfortable using the interface or were not literate, or indeed because they liked the feel of physical currency in their hands, people continued using hard cash. Even for those of us without such constraints, there was a choice to use digital platforms or cash as the situation warranted – I would go so far as to say that flexibility was part of the value that digital platforms offered!

ATM queues at a market in south Bangalore 3 days after the announcement

Photo credit: Janaki Srinivasan

The use of digital money could have been incentivized in many ways which would have involved dealing with the range of issues that people had with digital money that I outlined above. But making it impossible to get one’s hands on physical cash was not one most people would have advocated. Today, the use of digital payment platforms has grown tremendously post demonetization in the face of the limited availability of currency notes, especially change (the demonetization introduced a higher denomination Rs. 2000 note after discontinuing the Rs.1000 note, besides introducing new Rs.500 notes to replace the old Rs.500 notes). But, the adoption of digital payment platforms today is out of compulsion rather than a choice for many (though it is being called a sacrifice for the nation rather than compulsion). It is critical that we examine who is compelled to use digital platforms and who can choose to do so.

Notice at a popular chain restaurant in south

Bangalore letting customers know that

Rs.500 and Rs.1000 will not be accepted

Photo Credit: Janaki Srinivasan

Design 101 tells that an analysis of user needs should form the core of designing a product (whether in technology or policy). Yet, time and again, we have seen that the design of technologies (and of policies) starts by identifying a problem and solutions that are assumed to be desirable (cashlessness), and a vision that is neutral and unproblematic on the surface (who could be against eliminating ‘black money’ and ‘corruption’?), without consulting with its diverse potential users. While we have made headway in identifying the diverse practices on the ground that inhabit every monolithic category or concept on paper, it is perhaps time to explore in parallel how ‘desirable’ solutions get constructed in the first place and on whose interests and experiences of desirability these are based.

“No cash”: Where there’s no queue outside an ATM, we have learned that there’s typically no cash

http://www.newslocker.com/en-in/news/business/genset-sales-down-20-25-post-demonetisation-kirloskar/view/

You can read more about Janaki Srinivasan's research here and here. 

For further reading:

Dhingra, Swati and Amartya Menon (2016) "Demonetisation is not the way to tackle corruption" LSE South Asia Blog, November 30, 2016.

Masiero, Silvia (2016) "Demonetisation and information poverty: Insights from slum areas in Bangalore and Mumbai" LSE South Asia Blog, December 5, 2016.

Stay tuned for more posts to come on demonetization~

Enhancing DFS in Nigeria: the State of the Market

by Olayinka David-West, Lagos Business School

In January 2016, the Lagos Business School (LBS) launched a research project seeking evidence-based sustainable business models for the delivery of digital financial services (DFS) to the unbanked poor in Nigeria. Supported by the Bill & Melinda Gates Foundation (BMGF), this two-year initiative aims to provide evidence-based insights to support the mobile money conundrum in Nigeria as well as enhance ecosystem capacity. The initial stage of the project employed periodic industry dialogues, global expert knowledge sharing sessions, and in-depth global case studies produced by student-teams from the Pan-Atlantic University (PAU) community. These processes led to the writing of the State of the Market Report and the formation of the first ever Stakeholder Forum on DFS. The next phase of the project will focus on market-enabling policies for a thriving DFS ecosystem. This blog post summarizes the initial findings documented in the State of the Market Report.  

     For me as the team lead, this project titled "Sustainable Business Models for Delivering Digital Financial Services to Lower Income Unbanked Citizens of Nigeria" has personal significance and correlates with my broader interest--understanding the role and application of information and communications technology (ICT) in business and society. Since the mid-1990s, the Nigerian banking sub-sector has been extremely active in their adoption of ICT, capitalizing on various technologies to enhance service delivery and operations and has thus been focal to ICTs role in business and society. In 2013, I commenced scholarship with the Institute for Mobile, Technology & Financial Inclusion (IMTFI), coordinating the project on mobile money utility and financial inclusion in Nigeria and Ghana. It was a study in which my colleagues and I analyzed findings from each market and highlighted some adoption and utility contrasts between Nigeria and Ghana. In Nigeria, we empirically validated that in spite of the high mobile penetration rates, mobile money adoption and utility were exceptionally low, as a result of factors such as poor market development, trust and inadequate service delivery practices. 

      Unlike the widely recorded success of M-Pesa  and mobile money utility in Kenya, Nigeria is yet to reap similar benefits. As of 2014, 60 percent of adult Nigerians were financially served. Closing the gap to meet the national financial inclusion strategy (NFIS) target of 80 percent by 2020, would involve the acquisition of about 18 million consumers as well as contributions from all ecosystem actors. Consequently, this project is a scholarship initiative to support the achievement of the national financial inclusion strategy. In view of low mobile DFS utility, we sought to unlock insights and sustainable business models to propel mobile money operators (MMOs) in the creation and delivery of DFS to the financially excluded. 

     The consumer insights were derived from detailed analyses of multiple secondary data-sets on mobile money utility and access to finance (A2F) collected between 2008 and 2014. From the analyses, consumer profiles and value propositions of the under-banked and unbanked were articulated. On the supply side, the assets, resources and capabilities required and available to create and deliver sustainable mobile DFS to under-banked and unbanked consumers were examined. We discovered that suppliers require a complement of physical (technology, people, locations, finance and processes), human capital (competencies, partners and knowledge) and institutional (execution/leadership, competitive strategy, brand equity and culture) resources and capabilities for the effective and sustainable mobile money operations. The business model canvas highlighting the various components of the MMO business model is illustrated in Figure 1.

Figure 1: Business model canvas (BMC) for DFS.

We went a step further to dimension the spectrum of competencies, understand network (channel) management from the fast moving consumer goods (FMCG) industry and compute the cost-to-serve. We learned that MMO competencies range from technology, business, network and field service operations or management to customer support/service delivery. From FMCGs, we discovered that distribution channels are built around effective route-to-market (RTM) and trade promotion strategies. Finally, using cost- and process-based approaches, we computed average self-service and over the counter (OTC) costs. From the cost-based analysis, we estimate average self-serve and OTC costs of N132 ($0.42 ) and N604 ($1.92) respectively. Alternatively, self-service and OTC estimates from the process-based approach yield average costs of N91 ($0.29) and N172  ($0.54) respectively by using exchange rate of $1 to N314.7 for currency conversions. 

In presenting the DFS state of the market in Nigeria, we concluded with recommendations that once implemented could close industry gaps and move Nigeria closer to attaining the NFIS goals by the target date of 2020: 

1. Build network effects: the need for demand-side economies of scale or network effects through collaborative market development.
2. Adopt new business models: we propose either focused or specialist models or a hybrid (see Figure 2) that may be deployed nationwide or in limited geographical markets. 
3. Alter financial model to reduce transaction costs: cost reduction suggestions include the adoption of alternative and cheaper technologies, access to patient (inexpensive) capital and the   possibility of additional revenue streams.
4. Develop capabilities: the need of specialist capabilities in areas such as payments systems programming as well as more complex human capital and institutional capabilities are in short supply and in need of systematic and structured development. 
5. Alter industry structures: finally, we believe that some changes to the current supply and agent industry arrangements are required to facilitate better collaboration and interoperability amongst operators.

Figure 2: Sustainable business model proposals

All through 2017, we shall extend our scholarship pursuits and focus on understanding the role of another critical ecosystem participant, the regulators and market-enabling policies for DFS. Notwithstanding, we believe that adoption of these supply-side recommendations will lead to a more vibrant DFS ecosystem as well as the attainment of the national goals and the intended benefits of financial inclusion for all Nigerians.

References:

Mobile Money Utility & Financial Inclusion: Insights from Unbanked Poor End-Users in Nigeria and Ghana by Lite J. Nartey and Olayinka David-West. IMTFI Blogpost. Nov, 15, 2015.

EFInA Access to Financial Services in Nigeria 2014 Survey: Key Findings

Access The Digital Financial Services in Nigeria: State of the Market Report 

Influence of Mobile Money on Control of Productive Resources among Women Micro Entrepreneurs Participating in Table Banking in Nakuru, Kenya

IMTFI Researchers Milcah Mulu-Mutuku and Castro Ngumbu Gichuki's Final Report is available now on the ways that mobile money technology is contributing to women micro entrepreneurs' business strategies and control over productive resources in Kenya.

Dissemination workshop with women micro entrepreneurs
 and mobile money service providers in Nakuru town, Kenya

Report abstract
With mobile money technology being adopted, financial inclusion especially with regard to women and less educated is becoming a reality. In Kenya the high rate of adoption of this technology has resulted in more mobile money accounts than bank accounts. In this study we sought to determine whether mobile money usage influences control of productive resources among women micro entrepreneurs participating in table banking. The Government of the Republic of Kenya has been encouraging female entrepreneurship as one strategy of propelling the nation to the status of a newly industrialized country able to offer comfortable life to her citizens. Success in entrepreneurship is linked to control of productive resources yet this is a gendered aspect that favors men in much of the developing world. It is therefore imperative to document how women control these resources in the business context. A mixed data collection approach was adopted comprising a questionnaire administered to 392 respondents, two object-centered focus group discussions, and in-depth interviews with ten respondents. Questionnaire data were analyzed using frequencies, percentages and correlation coefficient while the rest were analyzed qualitatively. 

Important findings related to gender, discretion and control of resources
Mobile money technology has enabled women micro-entrepreneurs to control productive resources and especially business money. Results indicate that use of mobile money services influenced control of resources, especially those services that are easily integrated into existing social and business arrangements. Further investigations revealed that mobile money services have provided discreet methods of keeping business financial transactions shielded from husbands’ interferences. Interestingly, there was low usage of micro-savings and micro-credit services for table banking activities. Consequently, mobile micro-credit services had no significant relationship with control of productive resources. Qualitative data indicated that men are joining ‘women-only’ groups and are contributing new ideas and perspectives leading to investments in areas that are not traditionally for women.

Read their full report here

Their blog post on object-centered focus group discussions as a methodology to generate conversations with women micro entrepreneurs about their mobile money practices can be accessed here

“When I make sales, I want to sit and count my money at the end of the day”: Low Adoption of Digital Payment Platforms among SMEs in Ghana

by IMTFI Fellows Clement Adamba, Onallia Esther Osei, and Rebecca Sarku

"There is power and some good feeling in holding cash"

Introduction
Ghana’s informal economy is dominated by small and medium-scale enterprises (SMEs) whose huge contribution to the economy is widely acknowledged. SMEs are, however, characterized by limited application of technological innovation that could enhance business financial transactions. Current non-cash payment platforms in Ghana include switch and card, primarily operated by e-zwich, gh-linkTM; mobile or wallet money operated by big mobile telecommunication companies such as MTN, Airtel, Tigo, and Vodafone networks. There is also real-time gross settlement system (RTGS), a funds transfer system where the transfer of money or securities takes place from one bank to another on a "real time" and on a "gross" basis.

Mobile Money Vendor
Accra Central Business District

There are a limited number of SMEs using digital financial platforms for transactions despite efforts to encourage adoption and utilisation. The Bank of Ghana (BoG) has attributed the low adoption of digital payment platforms to high illiteracy and ignorance about the relevance of non-cash payment systems (BoG, 2014). In our recent study, we found that, indeed some operators of SMEs in Ghana have adopted some form of digital financial payment for personal and business transactions. Our study also confirmed that illiteracy and lack of knowledge about digital money are the two predominant factors that affect adoption and utilisation of available digital payment platforms. However, we found two other reasons that will require more than literacy to encourage patronage among SMEs in Ghana – the high value of cash and low feelings of trust.

In the remainder of this blog post we highlight some of people’s perceptions about the value or power of holding physical cash over digital money and the issue of trust expressed in the reliability of the system and its operators.


“I want to count my money…….”
There is the feeling among some SME operators that counting cash at the end of a day’s business is an indication of a good day. One is able to determine physically whether or not the day’s transaction has been good or bad. More importantly, holding money and counting it at the close of the day enhances one’s self-image and gives a positive self-feeling. In the expression of one lady in Makola, Ghana’s busiest market in the capital city of Accra, the power associated with the holding of cash supersedes digital money. The feeling of having cash in hand arouses a greater sense of liquidity, power and feeling.

Inside the Makola Annex Market

“When I make my sales, at the end of the day, I want to sit down and count the money. Then, my self-esteem is enhanced. And then I also feel that I am working. But if the money is on a machine like the mobile thing we are talking about, it doesn’t make sense to me. There is power and some good feeling in holding cash [more] than there is with numbers on your phone or on a card.” (A 28-year-old female make-up kit trader in a focus group discussion in Makola, 24/3/2016).

This expression resonated among most of the participants in our study, who immediately concurred with this sentiment. In cases where people have received a mobile money transfer for example, they will immediately go and withdraw the cash.


The other problem is trust
Negative experiences of some adopters with digital payment platforms have led them to lose trust in the system, which has provided added impetus for many to completely stay away from adoption and use of digital payment platforms such as mobile money transfer services:

Adawso Roadside Market

“When I went to a vendor one time to withdraw a customer’s payment for goods that she transferred into my mobile money account, I was asked to bring my code. And I was afraid that once I tell the agent about my code, they may steal my money. Meanwhile I don’t know how to operate my phone. So as soon as I gave my code out, I withdrew everything from my account. This is because my cousin said she left GHC 200 in her account but when she went to withdraw her money, she was told that she did not have anything in it. It means that either her agent or someone took note of her code and then withdrew her money. So I prefer to have my money in cash. I know where to hide the money and not even a rat could notice it in my room. [This is better] than this code and secret number things they are talking about as a form of security for my money” (A 40-year-old fishmonger in Adawso market, 18/03/2016)

However, the distrust of the mobile money system could often be linked to misunderstandings of how the system works. For instance, some SME operators expressed concerns as to why one had to pay for registration fees and charges for transfer and withdrawal of money from mobile money vendors. Others expressed concerns about the need to pay charges for some of the most basic services. These concerns suggested that the SME operators feel exploited with fees or charges; eliciting their fear that mobile money service providers are cheating them instead of helping them with their businesses. But mobile money service agents and some platform service providers have noted that what subscribers call registration fee is actually an initial deposit for the wallet, just as it would be the case in starting a savings account with a bank.


Acknowledgement of some positives with digital financial service platforms
Notwithstanding the concerns of some SME operators about the challenges and the fact that there is the need for one to count his/her cash at the end of day, some SME operators do acknowledge some positive aspects associated with utilising a digital platform service.

mobile money advertisement in Ghana

For example, it is safe and reduces the risks of theft or robbery associated with travelling over long distances with physical money. For example, a female trader indicated that:

 “I don’t carry cash in my bag these days. At first when I travel to buy goods, we are usually attacked by armed robbers but with the mobile money technology, I usually transfer all my cash onto my mobile money wallet and then when I get to my destination, I withdraw it into physical cash to transact business. And so, even if we are attacked by robbers, they can only take my mobile phone and only a small amount of money away. Even if I lose my mobile phone, I still have my money because the code is with me” (A 32-year-old female cosmetic trader in Makola, 06/04/2016).

Another trader noted that keeping money in a mobile wallet helps to avert impulse spending:

“The benefit of keeping my money in my mobile money wallet is that when they pay me cash, it is likely that I may do an impulse buying but if the money is in my wallet it will be very difficult for me to go withdraw it. I hardly get time and if I will have to join a queue very often to withdraw money, then I will prefer that the money remains in the wallet. So it is more or less like a bank savings for me” (A 27-year-old female trader in Makola, 06/04/2016).

Conclusion
Digital payment platform designers and service providers have an obligation to educate potential users of the digital payment platforms on the suite of services that they provide.

Field Interview, Ga-Mashie

They need to spend more time on public media to educate people about the operations or workings of the digital platforms and how even illiterate users can operate these effectively without relying on any second party for support. Improved education outreach can also serve as a catalyst in reducing fears about security and the safety of wallets. Specifically, user-centered education can help people understand how to access money in their wallet as well as operate and utilize all the available packages on the platform such as buying airtime and paying bills through the mobile wallet. Platform providers need to do more to allay subscribers’ fears of risk and losing money through theft, including by agents.

Read their final report here

Ceremonial Expenses as Relational Savings

By Isabelle Guérin, Santosh Kumar and G. Venkatasubramanian

"Bank saving is useless." Such is the claim of the men and women we have met over the past few months in various locations across rural Tamil Nadu (South India). This is despite the Indian government's strenuous efforts to inculcate a “culture of saving” into the rural poor through a series of financial inclusion schemes.

Are we to conclude that South Indian villagers are unwilling to save, incapable of planning for the future and attracted to wastefulness and extravagance, as various early 20th century British colonial reports pondered? In rural Tamil Nadu today, most rural households have their own bank accounts, and various mechanisms have been set up to facilitate saving deposits, including business correspondents to provide doorstep services and digital finance. But bank deposit accounts remain desperately empty,1 while spending on social and religious ceremonies continues to rise. It seems that even with the demonetization, 2 bank deposits remain low for the rural poor.

Although it might be tempting to jump to the same conclusions as the British colonisers and missionaries, this would miss the point. In-depth analysis of ceremonial transactions shows a different picture, and it suggests that ceremonial transactions should be considered as a specific form of saving: relational saving.  By this we mean saving transactions that are both shaped by and constitutive of social relations.

Savings are usually conceived of as money or wealth that is put aside to be used in the event of an emergency (including health crises, job losses, theft or floods) or to prepare for the future. But in Tamil villages, money and more broadly wealth are considered as something that must circulate. The two main purposes are material assistance - formal social protection is still the privilege of the few - and social status. People do save, sometimes even considerable amounts, but the very value of savings lies in constant circulation. If people find themselves with a cash surplus, it makes more sense to them to buy gold, as we have shown elsewhere, or even to inject that cash into their social network, for instance in the form of loans, or gifts that must be reciprocated later, most notably in the case of ceremonial gifts.

Ceremony organizers keep precise accounts of gifts (see the picture below).

Photograph 1. A puberty ceremony notebook 

Source: Venkatasubramanian, 2015

Counter-gifts are not strict equivalents, but are based in complicated logic that blends redistributive rules (the better-off or socially higher-up are expected to give more generously), reciprocity (among peers), and feelings and affection (notwithstanding rank, people often give more to persons in their close circle and those with whom they want to continue a relationship).

Ceremonies and their notebooks play a key role in family calculations, long-term planning and saving strategies for various reasons. As events, ceremonies are concrete opportunities to display and give visibility to family status (mariyatai). Insofar as ceremonies involve individuals' and their families' whole relationship sets, and are largely funded by this same set of relations, they are both an expression of mariyatai and a means of building it. A ceremony's clout is measured in terms of guest number and ‘quality’, the food served, and gifts received: this all aims to maintain, or possibly upgrade or at least not downgrade the mariyatai of the organisers (and their kin).

Ceremony costs can often seem puzzling, especially in comparison to incomes, but they are closely tied to the gifts expected (from invitees). This in turn depends on what gifts the organiser has previously given.  This makes the broad set of debts and obligations contracted through ceremonies crucial to households' financial positions. Households' life-cycle positions, social networks and particular circumstances determine them to be net debtors or net creditors. Some households “save up” (gradually accumulating through regular gifts before organising their own event, see fig. 1 below), while others “save down” (organising an event and then slowly paying back), while others “save through” (a mix of the two).

Fig. 1 below shows a household that regularly saved since marriage in 2005 through regular gift-giving in its social circle, getting this partly back for the daughter's puberty wedding.

Fig. 1. Ceremonies as 'saving up'

Source: Authors

Parents with unmarried daughters most often "save down".  Sivakumar is a typical example. He first organises the puberty ceremony of his daughter. This allows him to acquire 13 sovereigns 3 of gold to be set aside for her future wedding. He will regularly have to pledge them to cover various needs and hope he won’t lose them. He will “pay back" (this is the term used) in around ten years, roughly when his daughter gets married, which will put him back into debt for many years.

We are not looking to idealise these practices. They both reflect and strengthen pre-existing inequalities on various lines. This is particularly true for gender inequalities, since the dowry counts as a significant share of wedding expenses and obviously contributes to women’s lower standing. This is also true for caste and caste inequalities, insofar as the style of upper castes and upper classes’ ceremonies tends to be the norm. Our point is that these dynamics and forms of logic cannot be ignored if we truly wish to design appropriate, fair financial services. For the moment, in the context of our study, the rural poor don’t use bank saving accounts because it goes against a vision of wealth as something that constantly circulates socially. Mobile money transfers, while still underdeveloped in rural South India, may have a more promising future.

The key question is whether the technology of digital finance could be used to fight specific forms of inequalities. Whether we like it or not, digital finance is most probably going to pervade our daily lives, even in the remotest of areas. Further research is needed to ensure that, rather than being outstripped by such developments, we can think about a variety of ways of using them to support democracy and equality.


Notes
  1 In our field area, bank account take-up was already widespread in 2010, with 91.2% households having a bank account. By 2016, take-up had risen to an even higher 97.5%. Much less had been achieved in terms of saving deposits however. The median amount remained unchanged (around 600 INR) and the average amount had even decreased (from 4470 INR to 2043 INR). Most bank accounts are in fact ‘dormant’ and mostly used as a channel for social benefits.
 2  On the 8th of November 2016, the Indian prime minister has announced that 500 and 1000 INR banknotes would be invalid after midnight of that day. Citizens have until 30 December 2016 to tender their old banknotes at any office of the RBI or any bank branch and credit the value into their respective bank accounts. The objective is to combat counterfeiting, corruption and terrorism financing.
  3 One sovereign is equal to around 8 grams of gold. It is the most common unit of measurement of gold in the region.

Read their final report here