M-PESA

M-PESA is one of Kenya's great success stories in the microfinance world, and one reason I've been really excited about getting the chance to travel here. It is a service that allows people to send and receive money to others via text (SMS) messages with their mobile phones ('pesa' is the Swahili word for 'money'). At least as important, it also allows people to save money in their M-PESA accounts, turning the ubiquitous M-PESA agents--corner stores, mobile phone outlets, etc.--into bank branches. In a world where there are five billion mobile phone accounts and about three billion people lacking access to basic financial services (like saving and borrowing), the simplicity of this innovation is beautiful.

*Recently, I came across the more relevant intersection statistic: the number of unbanked with access to mobile phones. I forget the exact number, but it was still substantial, if much less punchy.

** UPDATE: Here is one estimate, courtesy of BCG: perhaps 2 billion unbanked adults with access to mobile phones.

*** And another estimate, courtesy of Economy Times, together with the GSMA and CGAP: "about one billion people in emerging markets have a mobile phone but no access to banking services; by 2012 this population will reach 1.7 billion"
http://economytimesgh.com/insuranceIND_2.php?recordID=107

Alex, our driver while in Nairobi who lives in the Kibera slum, explained M-PESA to me better than any of the articles I've read. He was generous enough to walk me through his recent transactions.

M-PESA on Alex's mobile phone

Essentially, once he signs up with his national ID card, he gets a PIN, account number and password. With his account number, anyone else with a mobile money account can send him cash. (Safaricom's M-PESA is the most common, but Airtel, Yu and Orange all have their own mobile money platforms.) The sender deposits Ksh 555 into their M-PESA account by visiting an agent location and handing over cash to the agent. M-PESA deducts Ksh 25 as a fee, leaving the sender with Ksh 530 in their account. Then they simply send a text to M-PESA saying "Give Ksh 530 to Account X."

Alex sending money through M-PESA

The transaction happens as quickly as it takes to send a text message (and thankfully, they don't have AT&T here).

Confirmation of money sent by Alex

When Alex wants to withdraw his money, M-PESA deducts Ksh 30, leaving him with Ksh 500. For me, one sign of how imbedded this system is is that senders and receivers memorize the transaction fees and readily factor them in when transferring money.

While the upper and upper-middle classes still favor credit cards, mobile money has clearly taken off here. While Alex had a savings account before M-PESA, Fauz (our guide in Mombasa's Old City) said he uses M-PESA to save the tips he earns from tourists like us. Today, in fact, M-PESA came to our rescue when Moses needed Ksh 20,000 to replace the van's gearbox.

Along our drive, there were about as many M-PESA agents and places to top up mobile minutes as there were places to buy a Coke--which is to say, quite a few. The most common sign post on the main road is the one advertising the direction of the m-PESA agent. Most of the villages we passed had multiple M-PESA outlets, while a slightly larger town had more than a dozen M-PESA outlets (and multiple microfinance and traditional bank branches). In Nairobi or Mombasa, you could hardly go a few blocks in any commercial area without seeing M-PESA and other mobile money agents.

In Kenya, mobile money took off without the blessing or assistance of traditional banks. Those banks are now playing catch-up by partnering with the mobile networks. Unsurprisingly, in other countries like Nigeria, banks and their politically-connected special interest groups are resisting the entry of mobile networks into the financial services space. Afghanistan, however, has its own version of this service, called M-Paisa (named after the Afghani word for 'money'). I'm hopeful that any resistance will lack staying power, because what I saw on Alex's black & white Nokia looked like the future.

Dheroli and Chacher

Early on, I remarked that India was a land of extremes. A couple weeks ago, I saw Mumbai’s antithesis: the villages of Dheroli and Chacher. Despite the presence of a few tractors, most farming here is done the old-fashioned way: with bullock-pulled plows/carts and manual labor. The area is peaceful, picturesque and incredibly green.

To get there, Abhay (our project assistant) and I took a series of buses to Bordeli and then took a car for the last 30-40 kilometers. On the drive, we passed fields of cotton, castor and corn, acres of the greenest banana plantations, and a series of overloaded trucks, bullock carts and rickshaws. I was glued to the window and so absorbed in the scenery that I hardly noticed the lack of shock absorbers on our rented van or the blaring old Filmi music our driver insisted on blasting on his old cassette deck.
The main purpose of our trip was to meet with some of SEWA's members and conduct a few focus groups for the price information project. We wanted to learn how they’re using the futures prices we’re giving them to make their planting or selling decisions, and what we need to do to improve the program in subsequent seasons. On the price information project, not everyone participating would be considered poor, so there was some variety in the livelihoods of the people with whom we spoke. In fact, the largest farmer had almost 30 acres of land. Some of the homes in the village are mud huts, while the house where we held the Dheroli focus group was 200 years old and was owned by Prameenbhai, one of the larger and most experienced farmers. Despite the diversity in the group, each village seemed more like an extended family (and to some extent, it probably was).

Most of our questions centered on how farmers make their planting, growing, harvesting and selling decisions, as well as how the market is structured (places where they sell their crop, to whom they sell it and whether the process is an auction, private negotiation or something else). I've noticed that if I ask a yes or no question, people are reluctant to give a negative answer, perhaps feeling that saying 'no' would offend us. This is sometimes obvious when the 'yes' response is inconsistent with other things they've already said. There's some literature on this, which I won't get into.

Even though we asked them a continuous stream of questions for two hours, everyone was extremely gracious to us. Villagers came to meet us promptly, and of course, the tea flowed abudantly. The Sarpanch of Chacher village (the chairperson of the village's governement) told me "you are most welcome here anytime." Which is nice, since I might want to retire there one day.

Incensed!

It’s been a busy few weeks packed with several field visits to the Ahmedabad slums and villages in rural Gujarat. Something has been eating at me all week. And it isn’t whatever was in my bed at ‘Hotel Sketchy’ in Bordeli during my village visits last week.

It’s Shilpaben, a middle-aged woman who lives in the predominantly-Muslim slum of Juhapura on the southern side of Gujarat. To call Shilpaben a working mother would be quite the understatement. On top of working all day to provide for her family, Shilpaben helps prepare meals for some of her community’s most malnourished children as a member of Saath’s Jeevan Daan (literally “Gift of Life”) program. Just as a quick aside: Saath is one of the MFI’s that we’re partnering with, and their Jeevan Daan program helps mothers prepare more nutritious meals for their families, particularly by helping them understand which foods are both cheap and nutritious.

All day long, Shilpaben makes incense sticks, rolling them individually by hand. In a single day, she makes about 3,000 of them, which she sells to a wholesaler who packages them into boxes of 12 and then sells. For every 1,000 sticks that Shilpaben makes, the wholesaler pays her 12 rupees (about 25 cents), so she earns about Rs. 36 per day (75 cents). The wholesaler, on the other hand, sells boxes of 12 sticks for Rs. 10-15 (about 20-30 cents)…more than 70 times the price he pays Shilpaben!

As a result, Shilpaben is living on less than a dollar a day instead of potentially $50 per day (the price all 3,000 sticks at the wholesaler’s price). I’m both outraged and confused that a seemingly simple problem exists here (though of course I don’t know the whole story). Even if Shilpaben is a much better incense stick maker than incense stick saleswoman, isn’t there some amount of time she should spend trying to sell her sticks to consumers? Wouldn’t the incense sticks still fetch a good price if they were tied with a ribbon instead of put in a box? And if everything from milk to soap is sold door-to-door, why can’t incense sticks be too?

The future and spot of price information

I worked more on our futures/spot prices project this week. I'm blown away by the ingenuity of the program and its potential, but the concept is fairly simple.

An overwhelming majority of the world’s poor rely on agriculture for subsistence. For these households, output risk and price risk constitute major obstacles to asset accumulation. Because farmers operate on thin margins and are often in debt, negative price shocks can have devastating consequences. The small farmers at the origin of the supply chain --the people who are the most vulnerable to these shocks-- face a host of difficult investment decisions with significant consequences for themselves. Farmers’ choices about which crops to sow, when to sow them, whether to invest in high-yield seed or fertilizer, when to harvest, and when and where to sell the output can mean the difference between meager subsistence and profitability.

Unfortunately, small-scale farmers in developing countries like India often have only imprecise knowledge of market prices, and even less ability to predict prices into the future. These inefficiencies at the origin of the supply chain also affect overall agricultural productivity. The recent increase in commodities prices presents both challenges and opportunities for developing countries: food prices have escalated, but on the other hand, farmers could potentially earn more. Realizing the opportunity, however, depends on markets functioning well and, in turn, on individuals making efficient decisions about planting, harvesting, and selling their crops.

This is where our project comes in. Our goal is to supply future price information to farmers on their specific crops so that they can make more informed predictions of which crops will be most profitable in the coming seasons. Additionally, after the harvest, we will provide spot prices at their various local markets for the crops they are selling. This lets the farmers know which market to take the crop to without wasting money shipping their crops from one market to the next (typically, small farmers pool their resources to hire a truck).

Having more efficient production and distribution benefits farmers by increasing incomes for those who depend on agriculture for their livelihoods, and benefit everyone, by reducing wastage, increasing output, reducing prices, and potentially lowering volatility. 

In 2003, the Indian government legalized futures in all agricultural commodities, leading to the establishment of two large exchanges in Mumbai. These unfolding changes are spurring dramatic growth in futures volume and the range of contracts available, with large farmers gaining access to trading and market information.

The futures market is at the center of a vigorous policy debate in India. In particular, critics of the commodity exchanges often claim that futures speculation has caused increases in the price of food grains. Although a government commission appointed to investigate this claim came back with mixed findings, it is not surprising that futures markets have come under fire in India.

I'll write again soon with more details about how we're actually diseminating the price information.

The First Ten Days

I’ve just about finished two weeks at the Centre for Microfinance. I’m splitting my time between three projects that are going on here. One is looking at whether giving farmers information about crop futures prices (via a billboard in the village or via a text message to their mobiles) will have any impact on their planting decisions, or whether spot prices at local markets will have an impact on where they take their crops to sell. The second project is looking at how different methods for teaching financial literacy affect the take up of the material (which is hopefully manifested in future financial decisions). The last project is trying to create a viable rainfall insurance contract that farmers want.

Each project offers a different side of microfinance. The financial literacy project obviously tackles a core issue for the poor that keeps them under-banked and outside of the traditional financial sector and MFIs, and leaves them vulnerable to predatory alternatives. The weather insurance project deals with risk management at the policy level and consumption smoothing at the member level. And finally, the project on price information looks at technologies that can improve the playing field for the poor by giving them the information they need to make more strategic decisions.

So far, the most interesting days have been the two afternoons that I was able to spend with some MFI clients outside the slums of Vasna and the Old City. We organized two informal focus groups with members of Saath, a local MFI with a strong emphasis on savings and asset building. Our goal was to better understand the members’ baseline financial literacy so that we could design a curriculum appropriate for them. The first group we met with consisted of mainly housewives while the second group was made up of rickshaw drivers and owners of small- or micro- businesses such as kite vending, scrap metal and egg wholesaler.

Most of the focus group attendees are illiterate, but extremely saavy. Alex Counts (the founder of the Grameen Foundation) talks about this survivorship bias that leads the poor to defy stereotypes and misconceptions about their capabilities. Those that are somehow surviving poverty must be smart, resourceful and brave – traits that seem to aptly characterize the people I met.

Despite their minimal schooling (especially among the women), they showed a higher-than-expected baseline financial literacy. One reason for this might be the length of their experience with Saath, as they certainly seem to have Saath’s emphasis on savings engrained in them. When asked what they would do with a small windfall of cash (eg. a small inheritance or an especially good day at work), most said they would save it to protect against a bad day’s earnings in the future. I was especially impressed by one lady, Vastuben, who said she would not only save the money, but use her additional savings to obtain a bigger loan through Saath. On one hand, it seemed risky for her to essentially double-down on her savings. On the other, it reminded me of a PowerPoint slide that Vikram Akula (founder of SKS Microfinance) showed. In his presentation, he showed that the poor were often able to get ROIs between 30% and 230%. Of course plenty of microbusinesses fail, but his point was that microbusinesses tend to produce better margins than traditional businesses because they can keep their costs down through the use of family labor, low infrastructure costs and no taxes or legal costs. So, assuming his assertion is true, that could make Vastuben a pretty astute money manager.