Sustaining economic shocks – Diluted societal safety nets and financial planning

- By Subrina Shrestha |

Frequent and pronounced crisis lead back to poverty | Photo by: Markus Winkler / unsplash
Frequent and pronounced crisis lead back to poverty | Photo by: Markus Winkler / unsplash

With Nepali society transitioning rapidly in last few decades, Nepal’s financial sector too has transformed. Yet, progress is slow in terms of upgrading the lives of poor and low-income population as compared with lower medium income and higher segment of urban population.

The slow change can be attributed to the waning effectiveness of traditional knowledge system and community mechanism on resource management, slow progress in financial literacy and inclusion and inability of modern financial system to touch their lives.

At present scenario, Nepal needs to realign its strategies and accelerate in integrating the unserved and underserved into financial channels. Else, with economic shocks becoming more frequent and pronounced as witnessed in the last five years, there is high risk that poverty may bring larger population under its knees.

Weakening Societal Net

The Nepali society has been traditionally shaped by its strong cultural and societal practices. That applies in the area of savings, borrowing and surviving economic shocks too.

From day to day events in terms of how resources are used in the households to seasonal practices during harvesting, arrival of cold season, festivities and mourning – all of them have a component of saving and leveraging on societal networks and the reserves held during good times.

My father, during the Tihar festival, always emphasized on purchasing precious metals, however small, to please the goddess Laxmi and pray for abundance throughout the year.

His persistence on continuing this practice has softened significantly after I got married, the youngest among his three daughters for whom those reserves were to be leveraged.

Now that I reflect on the practice, I can’t help but think that those “good omen” practices were in fact behaviours that helped strengthen financial position of the family and survive economic shocks.

Long established community-based self-help group such as ‘dhigur’ that originated in Thakali community was built on social capital. Now infamous as Dhukuti in some urban areas, dhigur allowed rotation of pooled funds among participants who would use the fund in their business and trading needs including meeting urgent financial needs. However, with transition, some of our practices have become obsolete, some are seen as such and some misused. In some cases, value of good practices originally based on a strong community system living at arm’s distance have diluted significantly.

Photo by: Aaron Santelices / unsplash

With the waning relevance of community mechanism to shield against economic shocks, it has become more crucial for individuals and families to adopt and become better at managing formal financial tools as part of financial planning.

Financial Access and Literacy

Nepal fares well in terms of access to financial services. Only 18% of adult population were estimated to be financially excluded – without access to formal or informal financial services.

Despite the rapidly expanding coverage of financial institution in the country, poverty has remained an inadequately addressed reality. In 2019, Nepal’s poverty headcount stood at 8% (at $1.90 per person per day international poverty line). Around 31.2% of the population who were estimated to be living between $1.9 and $3.2 a day were at significant risk of falling into extreme poverty in the event of an economic shock.

Inability to sustain such event arises from multiple factors, mainly insufficient and unstable income but lack of financial planning is also a crucial factor. Again, the main contributor to weak financial planning and inability to manage financial distress appears to be low level of financial literacy.

An NRB study on behaviour of small borrowers in Nepal has also highlighted the need to improve borrower’s financial literacy to change their financial behaviour given the positive relation between the two.

The understanding of i) types of saving and the liquidity of such savings ii) level of risk appetite and risk tolerance iii) ability to identify financial goals and steps towards it, and iv) financial management tool basically sets the foundation to take informed decision for any individual.

In Nepal, financial literacy has also been a key area of focus for donor funded initiatives and bank-led CSR initiatives, which has enabled some changes.

But, in the course of my profession and my travel across the hills and plains of Nepal, I have witnessed a common trend – the masses fail to understand or come to terms with the future implications of their financial habits from debts to saving behaviour. In some cases, debts are unavoidable. In other cases, debts are outcomes of bad planning and decisions, some of which even worsen into debt traps.

Photo by: Alice Pasqual / unsplash

Institutional ownership of financial literacy related activities by organisations who could anchor the follow up activities after a classroom setting training could be the last mile activity. We are lagging behind there in providing necessary handholding to adopt the theories learnt in practice and thereby change behaviours.

Any efforts in improving financial literacy must be accompanied by easy access to finance, where access to financial service provider is the first step and must be succeeded by access to appropriate financial product.

Are service providers offering appropriate financial tools?

Traditional saving clubs in the form of Dhigur or Dhukuti, women group, societal group etc. and their surrounding mechanism have been the widely adopted saving and insurance tool of the poor – providing a fund to fall back on during economic shock and plan savings for capital purchase or big expenditure event like wedding.

Also, given the erratic nature of earning, low income earners do not necessarily borrow to meet capital expenses only but to manage their daily expenses as well, which is paid off during seasonal income flow.

Lack of low cost appropriate financial tool appears to be a key hindrance for the poors to address financial distress. A poor individual with erratic income stream is not a lucrative target segment for BFIs to develop products to cater to this segment.

On the other hand, the success of a cooperative model with daily savings collected at the client’s place of work or home along with easy and quick access to debt appears to be working not only for the low-income segment but for small and mid-sized businesses in cities as well.  The downside of this model is its comparatively high debt cost.

In order to enable the poor to save, the cost of accessing, using and maintaining saving accounts must be minimized and its process simplified. The same holds true for credit facilities.

Photo by: the FarSight

The success of M-PesaMicroEnsure and BIMA in global arena in the field of mobile-enabled micro finance and insurance services are cases in point that work as affordable, appropriate and accessible tools for the poor.

Availability of small-ticket insurance like MicroEnsure and BIMA with the option of paying premium amount on a daily basis and in some cases from the mobile balance itself has emerged as a boon for the otherwise uninsured population. Meanwhile, the ongoing expansion of the scope of these services to areas such as life insurance, personal accident and agriculture reflect their wide potential.

In Nepal’s case, its market still remains deprived of tech-driven low-cost financial products.

Who is the right provider for the unserved and the underserved?

Distinction between various classes of banks in Nepal is a thin line as A, B and C class banks appear to be serving the same market segment with similar product range.

Larger banks with investment in banking infrastructure, good looking brick and mortar branches at prime location and skilled human resources find it economically unprofitable and administratively cumbersome to serve a large portfolio of small ticket clients. It is obvious they will lack interest and motivation to target this market and develop products aiming them.

On the other hand, the low-income individuals who are just learning about financial tools and its usage will benefit from a more personal approach i.e., service from the people known within their locality, the very modality adopted by microfinance and cooperatives.

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One approach to catering low-income population should be gradual push of financial products starting from microfinance by means of enhancing awareness and ability to use them. They can then graduate to larger banks as their requirement expands.

But the lack of knowledge and confidence and sheer feeling of intimidation to approach and address big banks remains a ground reality despite government’s multiple steps to provide access to subsidized funding for the deprived sector.

For now, it is time to formalise Saving and Credit Cooperatives (SACCOs) with prudent regulatory control and ensure access to low cost wholesale funding for Microfinance and SACCOs.

Combine that with two focus areas: promoting development and adoption of tech-driven, low-cost, small-ticket saving and credit product and concerted and targeted effort on financial literacy to better position the low-income segment to weather economic shock.

Way forward with digital solutions

During the current pandemic, it is not only the poor who are struggling financially. The impact is evident across sectors, big and small, all pulling their socks up to best manage their financials and remain afloat.

But Nepal’s banking and insurance market is flooded by vanilla products, creating a gap even for mid and high earning segments who aren’t well informed of the possible customization of products, forget small-ticket clients.

A small borrower who lacks knowledge about grace or moratorium period, flexible repayment option, ballooning/reverse ballooning payment option will not be able to demand credit customization based on their business needs and will have to put up with the bank’s basic offer.

At flip side, the relationship officers lack any motivation to push for specific loan condition for a small client given the need to jump through hoops to justify proposed provisions to its risk department for credit approval. The back-end decision making at banks still has a lot of space for automation and digitisation, without which catering to small-ticket client with customized products will remain a far-off dream.

Moving forward, the financial sector stakeholders should work in a co-opetition model bringing banks, insurance and telecos together to develop and roll-out a simplified, streamlined, user friendly and cost-effective product. Being late movers, Nepal can leverage on the tried and tested global success cases, customizing as per the local needs and context.

As such, Kenya’s M-Pesa’s proven success in Kenya’s financial inclusion is a good example that catering to small ticket clients too can make money. But the failure of replicating it in South Africa, India and other countries highlights the need for customization for the local market.

Jumping the regulatory and bureaucratic hoops in the process of bringing together regulators and service providers is naturally an uphill task even when product development is taken care of. This necessitates a joint effort of the stakeholders.

As a result of the pandemic, investing in digital infrastructure has now become a priority for all actors, opening a beacon of hope for innovation in financial product and service modality. This must, however, result in the availability of appropriate product and platform enabling even the grassroot level individual to uptake a variety of relevant financial tools to integrate into their financial planning process.

Subrina Shrestha is a Business Expert. She is currently working as a Micro, Small and Medium Enterprise (MSME) and Agri-Lending Consultant at Business and Finance Consulting (BFC).

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