Financial inclusion

July 29, 2018

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OVAIS, a cook in my neighborhood, borrowed money from his brother-in-law to help with the construction of his house. He was initially offered the money as an interest-free loan on the condition that he allow his brother-in-law to live with him. Following a disagreement, his brother-in-law demanded repayment in full, with interest. With no savings, Ovais found himself in a financial crisis and asked his employers for additional loans to help him pay off the initial one.

Around the same time, a caretaker of the buildings in our area reached out for assistance as heavy rains had caused the roof of his house to collapse and he did not have any spare cash to repair it, and a driver in our neighborhood informed us of his daughter’s upcoming marriage and requested assistance to meet the expenditures for the wedding and dowry.

These are common scenarios for anybody who employs domestic help — the requests for financial assistance are unending. Some employers are generous and help their staff with expenses, such as children’s schooling. At the same time, we adopt a disdainful attitude and internalise negative stereotypes about the poor; we grudge them for being lazy, unwilling to work for money and unable to manage their finances. The research shows that such stereotypes are far from true.

Like other low-wage workers, domestic workers are not paid wages on which they can support their families. Informal employment also does not guarantee basic benefits that employers are required to provide, including health insurance, maternity leave and provident funds, resulting in greater risk of financial shocks. Harsh terms of employment leave workers dependent on their employers’ generosity for support. To worsen their plight, the financial system ignores the poor, forcing them to live without basic financial services and facilities — savings, credit, insurance. Consider how many of our domestic employees have bank accounts.

Only 6.9pc of adults here had a mobile money account in 2017.

Formal financial institutions see the poor as a risky customer segment that holds little potential for revenue and profits, and so the free market is not incentivised to create fin­a­ncial products and services to suit their needs. Financial resilience and the ability to save money for future expenses, to access loans, to make payments and to transfer money to friends and family, are basic necessities. Without these, the poor are at a greater risk of falling into poverty traps. They are also unable to improve their lives by investing in health and education, buying property or starting and growing their own businesses.

According to the World Bank’s 2017 Global Findex report, only 18 per cent of Pakistanis have an account with a financial institution. Compared with 68.4pc for South Asia and 56.1pc for the lower middle-income group of countries, it shows that Pakistan is lagging far behind. Eighty-two per cent of Pakistanis lack access to basic financial services that formal financial institutions provide, such as saving, borrowing, transferring money and insurance. While mobile money providers are attempting to fill this gap, progress is slow; only 6.9pc of adults in Pakistan had a mobile money account in 2017, compared with 21pc in Sub-Saharan Africa.

To survive on such low incomes, poor households maintain complex financial portfolios, managing several different informal channels of saving, borrowing and lending. This makes intuitive sense when we think about the minimum wage of Rs15,000 per month; how do families survive on this income and manage to keep food on the table and a roof above their heads, while also managing ad hoc expenditures for weddings, funerals, religious occasions, emergencies and so on.

At any given time, a household may have several active informal channels of lending and borrowing in the form of money or goods (a loan from a family member, advance wages or vegetables from the local grocer), as well as savings (assets, cash stored in the home or savings clubs aka ‘committees’).

That the poor somehow manage to sustain their households on below subsistence incomes with little access to basic financial services, non-existent public services and inadequate employment opportunities is a testament to the fact that they have to be resourceful and innovative in running their financial lives. Financial inclusion, which has recently begun to be highlighted as a development priority, is key to reducing poverty and inequality. As in many other sectors, digital technologies are now filling in the gap — democratising financial services and exploring new business models that are compatible with the needs of underserved populations.

Understanding more about the day-to-day lives of the poor and the coping mechanisms and strategies they employ to survive could help us create a system that caters to them and develop a little more empathy in the process. Not only is it a moral obligation, but this large unbanked customer segment holds big potential if we understand how to service it.

The writer works in digital financial services at Karandaaz.

Published in Dawn, July 29th, 2018