> Posted by Jacqueline Urquizo, Independent Consultant
Microfinance institutions (MFIs) have many questions to consider when developing new products. What are the future clients doing now? What are their motives? What characteristics can help segment clients into appropriate groups? How large is the clientele? Are there enough potential clients to warrant introducing a new product? How likely are clients to change specific behaviors? Are there key relationships between savings, credit and insurance needs?
We need answers to these questions to design products that respond to the market’s needs and are economically viable for institutions to provide. My research into how clients interact with financial services, The Financial Behavior of Rural Residents: Findings from Five Latin American Countries, looks at exactly these questions.
Many of the findings are intriguing. I was excited, for instance, to find that for many clients, the amount they save is more closely related to the objective for which they are saving than with their socioeconomic level.
I have no doubt that some of the findings described in the report are known to those who work close to the rural market; other findings perhaps are new. The purpose of the report was to aggregate the findings on consumer behaviors in one place that can serve as a resource to help the MFIs forecast demand, build a map of consumer beliefs for marketing purposes, and set up baselines to measure product performance.
Certainly the study reveals the need to develop better credit offerings for the rural market. It also showed how often the potential clients combine credit and savings to reach their objectives. Also, the study shows different ways of savings that we need to keep in mind when developing a product, especially the fact that saving is not always done little by little as, on average, 25 percent of the sample save from extra income received in one large lump sum, for example from a crop sale.
I’m inclined toward the idea of having a metric of the level of commitment to savings in specific markets. The study found that 13 percent of consumers set aside savings before spending newly acquired income. However, 60 percent of the target market saves after spending. They set aside what is left over after paying their expenses. “Saving before spending” indicates that the individual is prioritizing savings before all else. As a market gets more accustomed to saving we should expect to see more people “save before they spend”. From what I know about other regions, I suspect that this style of saving is higher in Asia and Africa.
There is still more to research and learn about rural households. I recently spent time visiting a livestock trade market in rural Colombia. I found many interesting similarities between this market and stock exchange markets; but instead of stocks and bonds there are cows and pigs. I would love to investigate and develop ways to increase liquidity in rural markets. Two examples of low liquidity in the financial lives of the rural poor: livestock is used as an investment and currency at the same time, and the present consumption of households typically relies on their future income after harvest. Developing financial tools to facilitate greater liquidity would address an important financial need. I was thinking of forms of factoring (microfactoring?) or mechanisms using the concept of warehouse receipts. Could technology help to make these ideas work?
In a similar vein, it is noticeable that insurance services underlie the success of other financial products, especially for farmers because of the inherent risks in agriculture. Insurance makes it easier to take on credit and supports long-term planning— both of which are essential for rural households. With accident insurance, for example, households might use part of their backup savings for investment rather than as a form of insurance.
I hope others are able to build on these findings and deepen our understanding of how financial service providers can better address client needs.
Image Credit: Accion
Jacqueline Urquizo is an independent consultant working on Market and Consumer Intelligence, Strategic Marketing and Product Development for low income markets. Formerly, she was the Product Development Team Leader and Market Intelligence Senior Director at Accion.
Have you read?
The Financial Behavior of Rural Residents in Latin America
Understanding Savings Behavior: A Comment on “The Financial Behavior of Rural Residents”
What Do We Really Know About Financial Behavior in Rural Areas?