Lecture Micro financing and micro leasing - An Introduction - Lecture 5

Lecture 5 - The bop market up close (and personal). In this chapter, students will be able to understand: Understanding clients, the market, and the opportunities; the market; the average consumer in the market; tapping the opportunities.

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THE BOP MARKET UP

CLOSE (AND PERSONAL)

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• UNDERSTANDING CLIENTS, THE

MARKET, AND THE OPPORTUNITIES

• Case Studies

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• Sonali’s house sits along an alley of

broken pavement with an open sewer

running along the middle Bundles of pipes have been laid helter-skelter on top of the pavement

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• Doorways are open to bring some relief to the dripping heat, and inside them sari-

clad women sit on the floor in

semidarkness, Sonali among them

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• A delicate young woman with two small

children, Sonali’s much older husband

works when he can, but lately has been at home because of a heart problem

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nosed pliers in her hand, twisting wires

hour after hour

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• Many of the women in Kherwadi do

beadwork or a similar handicraft such as tailoring or embroidery This kind of work suits their need to stay home, as cultural norms require, and allows them to look after the children

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• It is not a true microenterprise, however

Sonali actually works for a middleman who comes once a week to bring her the raw

materials and take away the finished

products He pays her by the piece She

earns only a few rupees for hours of twist and eyestrain

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• Most of the work she does is of low quality and will be sold in small shops to people in Mumbai, but some of the residents of

Kherwadi undoubtedly sew products that end up in handicraft markets around the

world

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• Sonali’s earning power is fixed by the

hours of her labor One of her main

financial needs is for what economists call

“consumption smoothing”: managing the ups and downs in her income

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• Sonali used her first microloan to help pay the unexpected expense of her husband’s fees at the local health clinic

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• Although repaying the loan will be hard

unless he returns to work, she is better off than if she’d gone to the moneylender

Many of the local moneylenders charge

only interest, not amortizing the principal

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• This practice leads clients into permanent debt If a borrower cannot get a large

enough sum together to repay the

principal, she will pay the interest forever

If she faces another emergency and has

to borrow again, her debt burden grows

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What Do We Learn from Delia,

Xavier, and Sonali?

• Even the briefest look at life stories of the working poor provides great insight into

their financial needs and the kinds of

customers they can be

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• Without stable employment in a

formal-sector job and with little or no sponsored social safety net—in fact, with few connections to any large institutions—vast numbers of the working poor survive

government-by operating microenterprises

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• In Egypt and Indonesia only 10 percent of the population works in the formal sector, and in Mexico only 20 percent These

enterprises range from retail shops to

family farms to artisanal manufacturing

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• Families often piece together several

income-earning activities: Delia operates a shop and rents rooms in her home and

Sonali supplements her husband’s labor

income with beadwork

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• Many such families face great

vulnerability, so much so that we can

consider vulnerability an integral part of

what it means to be poor Among the three people profiled here, two had experienced war, one had multiple thefts, and two had economically debilitating health crises

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• Financial services could help them

manage some of this vulnerability In the

absence of inclusive financial institutions, they turn to informal sources—friends and family, moneylenders and suppliers

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• The informal sources respond quickly

when needs arise, but they have many

drawbacks These clients used

moneylenders only reluctantly to solve

crises because of their high costs

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• Other informal sources, especially family and friends, are often seen in a more

favorable light, but their resources are

limited

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• The harsh realities of working poor lives, including poor living conditions and

exposure to risk, create a daunting picture for businesses contemplating serving the low-income market

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• It would be easy to conclude that no

prospects lie in their communities Looking below the surface conditions, however,

reveals a different picture, one that brings

to mind qualities such as resilience,

determination, aspiration, and

self-reliance

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• The working poor have many assets, but lack mechanisms to leverage those

assets This is the essential insight put

forward by Peruvian economist Hernando

de Soto in his book The Mystery of

Capital, and it points to a crucial role for

inclusive finance

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• De Soto pointed out that the poor actually control a surprising amount of real assets

in the form of housing, business premises, and other physical wealth

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• In Peru alone, de Soto estimated that

these assets totaled some $90 billion,

about 11 times the value of the Lima Stock Exchange

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• Worldwide, de Soto estimated in 2001 that about $9.3 trillion of dead capital in poor

communities was waiting to be leveraged from informal assets and enterprises

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• As important as the untapped physical

assets may be, the human and social

assets of the poor may be even more

valuable, though far less recognized

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• Delia and Xavier are resourceful

businesspeople who have found ways to earn

• a living despite numerous hardships Delia has friends who help her, while Xavier

supports members of his extended family

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• Both have become expert money

managers through years of experience

Their aspirations to improve their life

circumstances make them value the

opportunities offered to them, such as a

loan

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• That value translates into willingness to

pay for services and repay credit on time Xavier and Delia are ideal—and profitable

—customers for inclusive financial

products

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• Sonali faces more extreme poverty and

has fewer assets to draw upon It might be surprising to learn, however, that even

Sonali is a client, having opened a savings account at ICICI Bank through its linkage with a microfinance institution (MFI),

Swadhaar FinAccess

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• De Soto’s proposed solution to the lack of leverage that characterizes assets of the poor involved land titling and other forms

of official recognition, for these solutions

would legitimize the fruits of grassroots

labor and investment

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• Another thinker, C K Prahalad, proposed

a different solution—a business solution

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• Prahalad challenged the world’s largest

corporations to find their own ways to

catalyze the BOP market, contending that the potential rewards of doing business in emerging communities are worth the

required adaptations

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• He suggested four components necessary

to build a commercial infrastructure for

BOP markets:

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• Improve access through distribution and

communications systems

• Create buying power with financial access and income generation

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• Neither Prahalad nor de Soto are primarily interested in financial services, but their

arguments point strongly toward inclusive finance as one of the most important keys for unlocking the potential of the BOP

market

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• Financial services allow people to

leverage their hidden assets (de Soto),

and they are a central part of the

commercial infrastructure needed to make business work in BOP markets (Prahalad)

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• Prahalad’s suggestions require rethinking almost every aspect of doing business,

whether it be the price/performance

equation, brand management, market

building, product design, packaging, or

capital efficiency

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• Throughout this course we explore how

such adaptations can work in the financial services sector

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• The market

• The average consumer in the market

• Tapping the opportunities

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