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Micro and small enterprises: Will the pandemic put an end to their business?

Posted on by MSC

Mohammad Islam runs a small grocery shop in Dhaka. Like many, he was aware of the COVID-19 crisis unfolding in China. Yet he could never anticipate the pandemic would hit him and his business so fast, and so hard. Since the Bangladesh government announced a national lockdown, Mohammad Islam has seen his revenues decline by 20%. Thankfully, his business falls in the “essential services” category. He is allowed to open his shop albeit for limited hours. However, his stock levels have been depleting and supplies remain unpredictable. He thinks small traders like him, particularly those whose businesses are shut completely, will suffer the most. These businesses are also least likely to receive support from anyone, including the government. “The government plans packages for large businesses and the poor—nobody thinks about us”, ruminates another small trader in Nagerhat, Bangladesh.

Policy measures will be needed to minimize the impact on micro and small enterprises (MSEs) like those managed by Mohammad Islam. This case is symptomatic of the position of MSEs across low- and middle-income countries. These businesses are more vulnerable because they have limited cash reserves. And of course, business cash flows are fungible with household cash flows and vice-versa. They have rents to pay, typically make a significant proportion of sales on credit, and rarely use formal financial products.

Since the pandemic, the realization of sales proceeds on credit has crashed even as revenue continues on a rapid, downward trajectory. This will have an impact on the survival of MSEs in the short to medium term. Such businesses are un-registered, which makes it even more difficult for policymakers to target them effectively for support.

In this context, MSC kick-started a three-stage research exercise across eight countries in Asia and Africa to understand the nature and extent of the impact of the COVID-19 pandemic on micro and small enterprises. The research will gather evidence to inform policymakers to devise short–term, medium-term, and long-term support for such micro and small enterprises. The research will also inform MSE-focused financial institutions and their investors on remodeling business strategies to address the evolving needs of such enterprises better.

The early evidence from our research provides important insights that policy makers and other key stakeholders should consider as we prepare for recovery and rebuilding.

Most micro and small entrepreneurs believe that it will take at least another three months to normalize businesses, once the pandemic has been contained. Businesses that had purchased inventory immediately before the lockdown are the most affected.

Data from 57 of Stuart Rutherford’s financial diarists, all of whom are from low- and middle-income households, in Hrishipara in Bangladesh, highlights a sharp decline in income and expenses immediately after the national lockdown. The Hrishipara Financial Diaries provide invaluable granular details on the lives of the poor and the impact of COVID-19. They show that income per household per day has currently dropped to BDT 100 (USD 1.18). Their expenditure has consistently been larger than income during the period, suggesting that household reserves are being eroded steadily.

This decline in economic activity and erosion of savings at the household level is likely to reduce demand, which will further have an impact on micro and small businesses that serve these low- and middle-income households.

Household Income and Expenditure graph

Household Income and Expenditure graph

The story is similar in Indonesia, where the availability of credit from suppliers has started to dwindle, affecting the liquidity position of micro and small enterprises. “Before the Corona pandemic, my wholesalers allowed me to buy goods on credit. The pandemic has resulted in scarcity, and the wholesaler has stopped extending credit for products that are in high demand, such as vitamins, paracetamol, antibiotics, and flu medicine”, said a small pharmacy owner in urban Jakarta. He went on to add that wholesalers accept nothing but cash payment for these products. Restrictions have also been placed on the volume that can be stocked to avoid hoarding. “For other products that are not so much in demand, the wholesaler is still willing to give credit for one month”, he says.

Financial Diary of a village shopkeeper in Bangladesh

Financial Diary of a village shopkeeper in Bangladesh

While credit from wholesalers is drying up, MSEs are finding it difficult to realize cash from credit sales that they have made to their long-standing customers. “I give items on credit to many of my repeat customers—most of whom are daily wage earners. These customers used to pay me in cash on a weekly or monthly basis. However, because of the lock-down, people are not allowed to move freely and the amount owed to me is mounting. I am now worried whether I will ever realize my dues,” rued a small retail trader of tobacco and bakery products in India. Despite the challenges, some grocery retailers in India feel obliged to provide credit to their existing customer base, further adding to their liquidity crunch.

Given the evidence so far, a comprehensive policy framework to support micro and small enterprises will be essential. Many governments have responded with specific measures, such as a moratorium on the repayment of existing loans by MSMEs. However, these are at best, short-term solutions. A more nuanced approach will be needed going forward. Otherwise, the survival of most MSEs will be open to question.

A policy framework to accelerate the recovery of micro and small businesses should achieve the following objectives:

  • Address the immediate shock in cash flow

The liquidity crunch has severely affected microenterprises, particularly those managed by low-income families. They need immediate cash assistance to manage short-term cash flows. A cash transfer spread over three to six months will help these enterprises address the immediate shock in their cash flow. The volume of such cash transfer should cover the basic monthly expenses of the household.

  • Support enterprises to reduce expenses

Governments may consider offering direct subsidy to micro and small businesses through a waiver of utility bills. However, such a waiver should be tier-based to prevent wastage and overuse. “Electricity and water should be available for free for up to three to six months so that we can cover our losses. This might help us a little. Otherwise this year we do not know what we will earn and what we will save,” said a manufacturer of printing machinery in India.

  • Take proactive measures to boost sales and augment supply

Even amid the national lockdown in several countries, businesses classified as “essential services” are allowed to function with certain restrictions. The government, particularly local authorities, should work with such enterprises to ensure they can sell their goods without any fear of forced closure of shops. Our research shows that the police response across and within several countries is variable—some allow stores to remain open, while others insist that they shut.

Also, local authorities should permit and promote enterprises that offer home delivery services to support their sales.

Policy-makers should also focus on improving supplies. The value chain that gets raw materials and goods to MSEs must function effectively. Evidence from grocery stores in our research sample from India suggests that while the supply of food grains is robust, the supply of packaged food and other non-food essentials, such as toiletries and personal hygiene products is limited. This may be because the manufacture of such products has stalled or due to the closure of state borders, which restricts the movement of goods.

  • Promote the adoption of digital payments and the use of social media

Many entrepreneurs, especially in India, have been taking orders over WhatsApp. Customers enter the items they want or send a picture of their hand-written shopping lists. Digital payment options like Paytm and GooglePay facilitate home delivery options. The government should promote social media and digital payments as it helps social distancing even as business can be carried out. Governments may partner with private sector players, such as digital payments firms and social media platforms to enhance both personal hygiene communication and the development of the digital ecosystem.

  • Increase access to credit

The moratorium on existing loans to MSMEs, where allowed, will help address immediate challenges in liquidity. Nonetheless, those businesses that are allowed to operate during the lockdown will be able to repay their existing loans. However, they will need assurance that they will get additional credit once they complete their repayments. Therefore, policymakers and financial service providers need a nuanced, rather than a blanket approach.

Digital lenders that offer working capital assistance based on cash flows may be positioned better to offer instant credit delivered remotely. Any repayment moratorium on loans to enterprises should be based on the recovery cycle and the cash flows as they build-up. Similarly, a moratorium for those entrepreneurs who take loans after the initiation of lockdown should be reconsidered, so that lenders have the confidence to advance credit to businesses that are still functioning. This will help maintain credit discipline while maintaining some business revenue and liquidity for financial institutions offering loans to such enterprises.

Financial institutions are also part of a value chain. Unless those that extend wholesale credit to MSEs, such as microfinance institutions, get similar repayment moratorium, the liquidity position of frontline financial institutions will be affected. Hence, repayments have to be reworked across the credit supply chain.

The government should also use the opportunity to boost efforts to formalize micro and small businesses to deliver some of these policy outcomes effectively. This may require confidence-building measures among the micro and small enterprises and for MSEs to realize the benefits of formalization. The question remains — what are these and how do we communicate them effectively?

The economies have been hit already—we now need palliatives and ultimately cures

Posted on by MSC

The pandemic has pushed humanity against a wall. Economies both formal and informal seem to be falling off the cliff. These are indeed unprecedented times and hardly anyone alive today has experienced anything that comes even close in terms of scale. We have to admit that our perspective is limited and it will take some time to understand the scope and scale of the impact.

This reminds me of a meeting with Rubina at Dhaka, Bangladesh. These were pre-COVID-19 times and Rubina headed a typical low-income household where she faced and managed multiple challenges. Her husband had left her, she had persistent health issues, and her son had lost his job. As a result, Rubina suffered from emotional stress and had no money. The story of Rubina, or its variant, will now be the story of billions of low-income households across the globe.

Financial distress is not unheard of in low-income households. However, we are now facing a blast situation across a billion households which has turned into an acknowledged economic pandemic. Do policymakers have the resources and the data for effective countermeasures? 

Knowledge, attitude, and practice

Knowledge regarding the disease is in of itself a big impediment. Two months after the WHO’s announcement of the pandemic, many believed that the coronavirus will not impact them. WHO has rightly pointed out that the pandemic is also an infodemic with an abundance of misinformation. Low-income individuals are not immune to this problem. MSC has heard the following statements as part of our ongoing knowledge, attitude, and practice (KAP) survey across several countries:

  • “I have increased my intake of waragi—a crude local gin. I was told that the virus cannot attack a body that is saturated with waragi,” said a person in Uganda.
  • “If you have never left the country, how can you get infected with the virus?” asked a person in India.
  • “If you walk barefoot, the virus will not attack you,” said a person in Uganda.
  • “All one needs is to maintain immunity. The virus cannot impact a healthy body,” said a person in India.
  • “Runny nose is the symptom of coronavirus infection,” said a person in Bangladesh.
  • “Coronavirus is a problem of the heart. We’ve been too busy to spend time with God,” said a person in Indonesia.
  • “I know there is a helpline number but I do not remember it offhand,” said a hawker in India.
  • “I don’t know where the hospital is [for coronavirus] because I just came [from Manado],” said a woman in Indonesia.
  • “This is a very fatal infection but that is all I know,” said a person in India.

Nonetheless, some valuable information is getting through. The fear that the disease spreads through the exchange of currency notes is real. In Uganda, some people are keeping the leaves of a neem tree with their cash to disinfect it. Others are washing their currency notes. In almost all countries, many people adhere to the government policies on social distancing or curfews. However, some individuals are against these restrictions and question their efficacy.

We do not know the on-ground health situation in detail since health reporting in developing countries is patchy at best. MSC firmly believes that a feedback loop of evidence-based information must provide the basis for the development and deployment of effective communication and hygiene campaigns. To enable this, we have partnered with a range of government ministries and financial services providers.

The household economy

In addition to the assessment of KAP, our studies will explore the changing household economy as well as the role and experience of women in these times. We will also examine the coping mechanisms of poor households. Workers in the unorganized sectors are, at best, earning a fraction of the money they used to receive, if at all. Even those economic activities that have not come to a standstill, such as dairy, horticulture, corners shops, and vegetable or fruit shops are hampered by broken supply chains and rising competition. It is difficult to say if they will get enough fodder, enough insecticides, or enough FMCG supplies in the weeks to come. 

The pandemic is also the first real crisis for the gig-economy. It is very important to understand the impact on gig workers who do not have a social security net. How is the emergent digital economy faring in this pandemic? These are all questions we need to understand.

  • “If this lockdown lasts for another 1-2 months, I am planning to pawn my motorcycle. I think it is the best thing we can do for now. We will celebrate Ramadan in a few weeks, which is generally a time when food prices tend to increase. What will it be like this year? And at the end of the month, we will celebrate Idul Fitri,” worried a person in Indonesia.

The poor are nothing if not resilient. Evidence suggests that people are changing their profession or strategies in response to the loss of income.  A migrant laborer has become a house help while daily wagers are now fruit or vegetable vendors. City migrants have come back to their village and are now working in agricultural fields while a Gojek masseuse has taken to selling sanitizers. People are sleeping in their shops and market places to avoid traveling to their homes, afraid that they might infect their children. A fundamental restructuring of the economy is underway.

How can governments minimize the negative impact of this change? MSC is keeping track of these changes in household economies and the usefulness of the governments’ support systems. This will enable the formulation of recommendations on additional measures and policies to minimize the economic impact on the poor.

Remember gender

Policymakers must bear in mind that this pandemic hits women the hardest. Women, especially in patriarchal societies, are responsible for the health of their families. They provide care, supervise children, procure groceries, cook, and manage many more myriad tasks. COVID-19 is likely to amplify these demands. Husbands and children will be home and household tasks will need heightened activity despite the difficult circumstances.

Indonesian Women sitting

“Every day I go to work at 7 am and return home at 4 pm. Before going to my employer’s house, I need to prepare food for my family,” said a woman respondent from Indonesia.

“I hate this situation. My work has increased so much!” said a woman respondent from India.

Indonesian Women sitting

All government policies must be framed within this reality. It will be important to ensure that there is no gender gap in access to hygiene along with medical and financial resources. Indeed, the pandemic may provide an opportunity to empower women within the household. Essential commodities and grant support can be delivered to women. In India, the government has distributed INR 500 (USD 7) per month into the bank accounts of poor women under the PMGKY scheme. This will be repeated every month for three months.

Governments have a tough time ahead   

People do not have adequate information and the economy has come to a standstill. Savings are being depleted, while stored food or rations in households are running out and there are already growing reports of people sleeping hungry. Preliminary trends from our studies present a grim situation, where the vast majority of respondents report lack of employment and a growing financial crisis in their households.

On the plus side, governments are taking action. In India, the central and state governments have been distributing cooked food among low-income households. The Governments of Bangladesh, India, Indonesia, and Kenya have announced relief measures that include moratorium on loans. The types of loans that qualify for this exemption varies from country to country. Moreover, this may not entirely cover the loans taken by low-income households.

However, a moratorium on loans is just a start. A lot more needs to be done. Governments have to take measures to not only curb the pandemic’s spread, identify cases, and treat them, but also ensure cash support and the supply of essential goods to buy. Efforts are required to control the prices of inflation, provide financial assistance to those who have lost jobs, and ensure the safety of those who are working. Amidst this, for a low-income household, loan repayments, food supplies, and sustenance are the bigger concerns. As a woman in Bangladesh remarked, “Death from COVID will be much easier than starvation.”

Survival tips for start-ups—taking a leaf out of Bear Grylls’ book

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In his series titled “Man vs. Wild”, globe-trotting adventurer and wildlife enthusiast Bear Grylls demonstrates unusual techniques of survival while stranded in tough environments. These environments are either wholly unfamiliar for people or different from the ones they operate in. People are usually unprepared to handle the challenges posed by such hostile environments. Bear Grylls provides survival tips that come in handy to tide over such unplanned scenarios.

COVID-19 has pushed the start-up world into a similar type of chaos. Start-ups at different stages of their lifecycle are facing the heat. The magnitude of this extraordinary event has brought into question the very survival of these businesses and their strategies. This event is one of its kind in the past 100 years or more and has caught the start-up world off-guard. COVID-19 has bought the world down to its knees with almost simultaneous impact across multiple countries in the form of unprecedented lockdowns imposed by governments, numerous fatalities, disrupted businesses, and job losses. The fact that global economies are no longer disconnected has added to the strain.

Also sadly, to battle this chaos, start-ups have no precedence to follow and no book they can refer to. All they have are some words of wisdom from experts that further add to the commotion. For the start-up world, these challenging times can have a massive impact on their businesses and ultimately, their survival. Let us draw some parallels from Bear Grylls’ advice on survival in tough conditions.

Man vs. Wild Bear Grylls

Bear Grylls on the summit of Mt. Everest in 1998, aged 23. The youngest Brit at the time to climb the summit. (Courtesy: Bear Grylls Ventures)

  1. Preserve your supplies: Preserve cash and push the run-way further

In times of crisis, Bear makes the most of his limited supplies and preserves them for the unforeseen future. In this time where start-ups do not know when the tide will recede, they should take note of the following pointers:

  • Preserve cash; liquidity will be at a premium in the short to medium term;
  • Put any extravagant expenses like moving into a new office on hold;
  • Go slow on hiring and recruit employees who can multi-task—a finance person, for example, who understands marketing;
  • Push the run-way to at least 2x times (3 months to 6 months, from 6 to 12 months, and so on);
  • Re-negotiate your contracts with suppliers and vendors because your customers are bound to re-negotiate with you!
  • Tread cautiously on cash-backs and points-based rewards, among others;
  • Drop the idea of launching products that need substantial research and incur high costs of development. Go for products that need only incremental spends, instead;
  • Go with the adage “equity for capex, debt for opex and working capital.” However, for smaller start-ups, equity may be the only option. Besides, many start-ups lack clear rules around equity or debt, since money is anyways fungible;
  • Do not stock up on inventory as this locks up capital. Re-orient processes to reduce the working capital gap;
  • Build strategies based on the analysis of risk-based scenarios.
  1. Any water is better than no water: Look for funding from any source—institutional or individual

You would have seen Bear looking for all possible sources of potable water, which is a life-saving element in times of distress. Similarly, start-ups need to keep an eye out for any possible source of funding. It is common knowledge that funding sources will dry up, at least in the short term, since most investors are worried about their portfolios and will prefer to wait and watch. Moreover, first loss default guarantees (FLDGs) from banks or NBFCs would be nearing the 100% mark, which would make lives tough for lending start-ups. Here are some ways to keep hydrated:

  • Look for impact investors;
  • Try to secure small amounts from multiple sources;
  • Explore crowdfunding opportunities—mainly for social sector start-ups;
  • Look for individual investors – including family and friends (but be aware of the social implications of this route which may include reduced control, nepotism, buy from specific suppliers, and if all goes wrong, lose of face and friendship)
  • Be willing to pay a higher FLDG to keep the start-up running and re-negotiate as soon as things start to look better.
  1. Beware of snares: Beware of new partners and relationships—everyone wants to make a quick buck

Bear is extremely cautious of the snares and traps laid out for wild animals by hunters in the wild. Even a slight oversight can cause irreparable damage. In these times of trial, start-ups may be lured into partnerships that may harm their business interests in the long run. Hence, they should resist moves that are “penny-wise and pound-foolish.” Here are some quick tips to avoid these snares:

  • Conduct adequate due diligence of any new partner or vendor;
  • Conduct adequate due diligence before diluting equity and read all covenants carefully;
  • Negotiate hard and ensure that you get what you are looking for. This mainly applies to CAPEX-type investments;
  • Be careful while onboarding new equity partners—diluting equity at the cost of the vision statement may not be a great bargain;
  • Be careful when negotiating for FLDGs with smaller NBFCs. You run the risk of getting a smaller return while taking higher risks.
  1. Depend on your tools: Lean on your core employees—they are your precious resources

Bear depends heavily on his survival kit that includes everything from pliers and a flashlight to knives and ropes. Keeping these tools in order is important to survive in the wild. How many start-ups think of employees as their trusted resources / tools? In times such as these, it is necessary to retain valuable employees. As they say- Cut fat (discretionary spend) and preserve muscle (retain core employees). Some tips here:

  • Communicate with employees about the hardships and the path ahead. Inform them about all major decisions to gain their confidence;
  • Always speak of the proverbial “light at the end of the tunnel.” This is essential because many employees fail to maintain positivity, which affects their performance, drive, and commitment at work;
  • Show empathy towards employees, which will go a long way in cementing relationships;
  • Demonstrate responsible leadership with lenders, customers, and investors. This will enhance your reputation with the staff;
  • Provide opportunities for online training and certifications, among others, if the time and resources permit;
  • Delegate responsibilities—ask the employees to fight smaller battles in line with their capacities and laud every victory;
  • Motivate, support, and empower your team.
  1. Be agile: Keep your ears to the ground

At its core, agility is decision-making on the go. Bear, too, demonstrates that agility in non-native environments pays off. Watching your back helps ward-off unexpected attacks. The principles of agility (OODA) for start-ups become all the more important during these uncertain times.

The principle of agility for start-ups

Source: The Essence of Winning and Losing, John R. Boyd

Experts suggest that start-ups must remain agile around the clock. Agile development is a part of lean management prescribed for all start-ups. In these tough times, start-ups can benefit from some of the points mentioned below:

  • Look for cues / information in social media;
  • Look for changes in guidelines, regulations, and policies;
  • Look for changes in taxation sops and dates to file taxes;
  • Connect with your customers quite often—try to understand their pain points and consider tweaking your offerings;
  • Observe the direction in which the markets move and take note of any changes in the financial position of your country;
  • Keep an eye on what other start-ups are doing—observe how they cut costs, raise funds, and maintain a connect with their customers.
  1. Exercise and meditate: Take care of your health

In the wild, Bear Grylls is quick, coordinated, and powerful. This is only possible through his regime of a healthy diet and rigorous exercise. However, this is generally the last thing recommended to start-ups. The journey of a start-up is demanding and the burn-out rates quite high. In testing times as these, this rate of burning out is even quicker and sometimes irreversible. The pressure to keep the start-up ticking while providing answers to both internal and external stakeholders may result in extreme levels of stress. To maintain their wellbeing, start-up promoters need to take care of themselves and allocate some time for routine exercises and meditation.

As goes the saying “it is not a sprint, it is a marathon”. In regular circumstances, building your company is both a sprint and a marathon. COVID-19 has re-set the very tracks of these sprints and marathons!

Downturns and challenges will keep testing the mettle of start-ups. However, COVID-19 is of a different magnitude and has been right defined as a black swan event and finding a perfect solution to manage its consequences will likey be a work-in-progress for quite some time.

Having said that, some start-ups are determined to turn this crisis into an opportunity. Like Bear, who has crafted rafts and used violent river currents to accelerate his journeys, some of MSC’s start-up partners are using this situation to their advantage by offering insurance products that secure their customers against COVID-19. Some others plan to make their transactions / processes completely digital to reduce costs and improve efficiencies. Let us not forget that some of the greatest start-ups that rule today, such as Uber, Airbnb, Square, and WhatsApp, among others, were born either during or soon after the global economic crisis of 2008.

MSC (MicroSave Consulting) is working on a multi-country start-up research to understand the likely impact of COVID-19 on start-ups. In our upcoming blogs, we will come up with the pain points of start-ups and their end-customers. We will also elaborate on the short-term and long-term strategies that the start-ups should follow. Watch this space for more adventures!

An abridged version of the blog was published on CIO East Africa on 11th of April, 2020

The blog was also published on Start Up Magazine, Soko Directory and Business Today

Digital ROSCA—the new kid on the block

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Ravi is a 32-year-old deliveryman who works for Zomato—a FoodTech unicorn in India. He receives his earnings on a weekly basis. Despite the long list of monthly expenses, Ravi delays the payment for his rent, groceries, and bike fuel and maintenance to the second, third, and fourth weeks of the month, respectively. He ensures that the money he takes home during the first week goes to a Rotating Savings and Credit Association (ROSCA), also known as “committees” or “Beesi” in India.

ROSCAs: A primer

ROSCAs are financial instruments in which the members participate voluntarily. These members usually comprise a trusted social network that includes the family, relatives, friends, neighbours, and colleagues. The members commit to making equal and regular contributions to a fund, typically on monthly or weekly cycles. A different member picks up the lump sum at the end of each cycle.

ROSCAs are prevalent all over the world and are known by different monikers in different geographies. They have given rise to various innovations pursued by donor agencies in the saving groups, from Accumulated Savings and Credit Associations (ASCA) to Village Savings and Loan Associations (VSLA) to Savings and Internal Lending Communities (SILC) to Self Help Groups (SHGs).

Millions of low-income people across the world use ROSCAs as instruments of savings and credit. Since these people are susceptible to income volatility, ROSCAs give them the unique option to pursue a savings goal, as well as an opportunity to build social capital and creditworthiness. ROSCAs are not only popular with individuals but also with small businesses worldwide that participate in them to manage their need for working capital. Today, ROSCAs amount to more than USD 500 billion in value raised worldwide.

Despite the introduction of formal financial products among low-income people, ROSCAs remain the most popular savings mechanism. Ravi, too, implicitly trusts the ROSCA and considers it the instrument of “first choice” for his financial planning. For Ravi, all other formal financial products that he uses are mere add-ons, such as bank accounts, fixed deposits, and an endowment policy of the Life Insurance of India (LIC). Formal financial products have proven unable to match the flexibility, convenience, and trust embedded in ROSCAs. No wonder Ravi has opted to save through his ROSCA, despite being capable of using his smartphone to digitally manage his finances through a mobile wallet or a mobile banking app.

This brings us to the question of whether ROSCAs can and should be digitized. We have seen that the personal identities of members and their contributions—the two defining aspects of ROSCAs—can be shared and managed digitally. Indeed, several FinTech start-ups across the globe have launched smartphone applications that target digitally savvy youth, hoping to redefine one of the oldest financial products in the world. However, it is prudent for the developers to approach the product design iteratively. They should incorporate the best attributes of physical ROSCAs and avoid the common pitfalls of the digital marketplace, such as algorithmic blindness, poorly designed user interfaces, and the lack of good internet connectivity. We at MSC (MicroSave Consulting) followed a similar approach for the technical assistance we provided to FinTechs in the financial inclusion lab in India.

Given below are the four key aspects that FinTechs must address as they seek to digitize ROSCAs:

1. Low-income individuals are extremely price sensitive to fees charged in digital transactions. ROSCAs appeal to this target segment because they do not levy extraneous costs and require minimal record-keeping. However, people would lose this benefit if they had to pay a membership fee to a digital platform to manage the transactions of their group and distribute the lump sum. This price sensitivity is further accentuated by the fact that many members are conditioned by a present bias—they join the group merely to be the first in rotation to access the lump-sum, also referred to as the “early pot motive”. In fact, some members regret joining a ROSCA when their distribution is slated for a later date in the cycle. Hence, they are likely to be discouraged from using a ROSCA in a digital format if they are expected to pay a fee upfront.

2. The role of a group leader is pivotal to the administration and success of a ROSCA. The group leader pre-selects suitable candidates, brings members together for meetings, guarantees that the money is not lost, and serves as the human ledger of the ROSCA who retains the records in an informal manner. For a ROSCA to operate on a digital platform, the members need to negotiate on various aspects. They need to onboard new members and decide on the distribution cycle as well as the rotation policy. For many ROSCAs, the status quo of remaining offline with a designated group leader could appear less of a hassle.

3. Social interactions among the members of a ROSCA cannot be replicated or understood clearly on a digital platform. Digital platforms that promote ROSCAs are keen to use the data of its members to cross-sell customized third-party products such as credit (typically offered to those who have not yet accessed the lumpsum payment), insurance and cashback coupons, as a way to keep usage fees low. However, since most of the social dynamics in ROSCAs takes place offline and face-to-face among the members, it is difficult to build an adequate customer profile that can be used to cross-sell products, even with the advent of chatbots and artificial intelligence.

4. The poor have used ROSCAs historically as an informal savings product for the household and not just the individual. While Ravi may put his own money into the ROSCA after the first week of each month, this does not necessarily mean he uses the lump sum for personal expenses or without consulting his family members. It is necessary to understand the group and family dynamics to design the products accordingly. To replicate offline decision-making, chat groups can be made available on the digital ROSCA platforms to enable the family members to hold discussions.

Our work on the digitization of savings groups highlights the importance of human interface to complement tech algorithms. M-Chama, a digital ROSCA product offered by Postbank in Kenya, has incorporated human touch-points in the form of agent networks and partnerships with community-building institutions. Today, M-Chama covers close to 5,000 savings groups in Kenya and holds savings worth more than USD 400,000 since its launch in 2016. Although it is expected to break even this year, as per MSC’s analysis, M-Chama still has a long way to go, given that there are over 300,000 Chamas in the country today. Therefore, it comes as no surprise that mass digital adoption in Kenya, the epicenter of the digital finance revolution, has been in the area of payments or credit rather than savings. Physical ROSCAs continue to be the most sought-after means of savings in the country.

For digital ROSCAs to take off, they must embody the modular, customizable nature of their physical cousins. The burgeoning venture capital industry in India is also aware of the importance of incremental steps to digitize such traditional and informal savings platforms. Although the digitization of ROSCAs introduces perceived benefits, certain behaviors and interactions cannot be replicated on a digital platform. For example, the digital platform can harm the creditworthiness of a ROSCA member who delays their payment for a genuine reason. This discipline or rigidity has deterred low-income individuals from taking up formal financial services.

Digital finance presents many opportunities and avenues for social transformation but ROSCAs may indeed be the final frontier. Yet as things stand in Ravi’s case, he may depend on the digital world to earn money but he would not save through a digital ROSCA just yet.

The blog was first released on Inc42.com as an authored article.

Covid-19 and low-income households in central Bangladesh

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Income plummets in Bangladesh as a result of Covid-19 – Stuart Rutherford’s Hrishipara diaries reveal, in graphic detail, the daunting scale of the challenges facing the poor worldwide. “Anxiety prevails, as shown in the end-March version of the monthly survey we take of our diarists’ thoughts about the month just past, and their hopes for the month to come. The fear, overwhelmingly, is of loss of income. Much of what needs to be done by policymakers is already understood. This blog testifies to, rather than reveals, those needs. What is described here suggests than from the diarists’ point of view the top priorities are relief measures to ensure food and income security and to prevent distress sales of assets. Financial services need to be unlocked, above all to release savings in MFI accounts. And the high level of anxiety means people need, somehow, to be reassured.