NB Financial Health

Wednesday
June 18
2014

Ignacio Mas and John Gitau

Everyday Financial Alchemy: How the poor make money appear on cue

We often talk about the financial needs of the poor. But we really should be talking about their financial concerns.

The purpose of finance is not just to help make ends meet, but to create a sense of opportunity and provide peace of mind. To that end, poor people´s financial concerns revolve mainly around making money appear as and when they really need it: as recurrent expenses come due, and when one-off needs and emergencies arise.

If this sounds a little like performing a sequence of magical financial acts, indeed that´s often how they experience it. In money matters, as in magic tricks, self-deceit plays an important role. That´s why people will often look at lotteries as yet another potential liquidity sourcing mechanism rather than senseless gambling. And also why people are invariably positively surprised when they break their piggy bank and count the money they’ve put into it. But as with magic tricks, when it comes to conjuring money, the real action is what’s happening behind the curtain, in the intricate preparation that lies behind the poor’s flexible cash flow.

Poor people employ two fundamental strategies to make money appear on cue: income shaping and liquidity farming. These two terms are metaphors for collections of behaviors which one can observe, in different forms, across markets and cultures. In a previous post on NextBillion, we explained liquidity farming; here we discuss income shaping, and the relationship between these two concepts.

Income shaping is about diversifying income sources so as to achieve a more stable and secure cash inflow profile, one that matches as much as possible one’s desired recurrent expense patterns (daily food, monthly rent, quarterly school fees, etc.). The poor tend to be more concerned about closing the gap between regular income and recurrent expenses — by shaping income to match their recurrent expenses, and failing that, by adjusting their level of recurrent expenditures — than about bridging the gap by engaging in more sophisticated budgeting and savings behaviors.

Income is shaped, for instance, when the micro-entrepreneur extracts small surpluses from her business in order to buy an egg-laying chicken — even if the eggs have a lower ROI than her main business activity. It happens when the farmer does some trading on the side to generate more frequent, recurrent cashflows – even if it detracts from the time and working capital he can dedicate to his farm. It happens when people seek three smaller wage jobs rather than a single main one – even if it limits their ability to excel at any. Though these tactics may come at a cost, the increased frequency of payoffs they bring outweighs any downside.

A similar dynamic occurs in liquidity farming, where people cultivate a variety of sources of future liquidity among their family, friends and acquaintances, which can be tapped whenever there is a shortfall in regular income, a special need (usually driven by lifecycle events) or an emergency. It takes considerable time, effort and money to build up and maintain this network. Indeed, maintaining the liquidity farm can be thought of as one more job that people take on. The little spending they incur to fertilize their liquidity farm is often incorporated into their recurrent expenditures, and might look to outsiders like non-essential expenses. But these relationships and resources can be harvested for liquidity at any time, each a potential lifeline. Without access to them, people would have to more often sell off assets or down-shift recurrent expenses (eg: move to a cheaper house, cut down meat consumption from once a week to once a month, take the older child out of school) – anxiety-ridden scenarios.

For poor people, finance is therefore much more about planning how to make money than it is about planning how to spend it. It´s about managing the timing of cash inflows, and then calibrating their routine expenses accordingly so that the need to manage saved household balances is minimized. This set of priorities may be at odds with the ones often instilled through financial education, where spending goals tend to be set upfront and become the basis for budgeting, and where the management of money is separable from how it was gotten and how it will be spent. For the poor, this separation doesn’t exist. More effective approaches to helping them manage their finances would take into account the complex alchemy through which they turn countless relationships and resources into cash.

Editor’s note: To illustrate how the concepts of income shaping and liquidity farming play out in practice, Ignacio Mas collaborated with John Gitau, CEO of Kenya Financial Education Centre. He shares his insights below.

I find the distinction between liquidity farming and income shaping quite subtle and fascinating – not because of their distinctive nuances but because of the drama and panache that characterize each. In many ways, the two tactics are analogous to flirting and marriage. Where liquidity farming has a coquettish social ostentation, the revenue assurance element of income shaping has a distinctly nuptial orientation.

While income shaping calls for meticulous and deliberate lining up of income streams to meet known consistent expenses, liquidity farming has an element of play and fun due to its reciprocity. I can’t help laughing when I remember an incident that demonstrates this. In one of my visits to my mother at the countryside, a neighbor popped into our home after seeing my car parked at the roadside. As she sauntered into our homestead, she loudly and jokingly said “Now nobody is greater than you because your son has visited you, and you plan to eat all the goodies by yourself so that you can get fat alone as we walk displaying our bony shoulders.” My mum burst out laughing and responded, “So now I cannot hide and eat alone? Have a seat.” The neighbor was welcomed with tea and believe me, she walked away with half a kilo of rice and I gave her Ksh 200. Note the playful nature of that encounter and you can understand the flirtatious nature of liquidity farming.

Income shaping, on the other hand, comes with a deliberately calculated aura – it streamlines income with a definite assurance that’s devoid of comedy. In my rural area, specialized labor providers get hired by their more affluent neighbors to do planting, weeding, pruning, harvesting and picking. They leverage their labor with other social qualities and tactics such as reliability, diligence, going the extra mile and treating their hirers’ family members exceptionally well, including bringing their children goodies. That way, they get assured of work whose income gets earmarked for certain expenses, such as school fees, food and investment. Their labor is a form of income shaping. Whatever they do to enhance it is meant to create the assurance that they’ll be able to meet their financial obligations when they come due.

It may not be seen as purely commercial, but sugarcane and tubers grown around rural homesteads are timed revenue streams posing as homestead foods. One realizes their economic importance when they are hurriedly harvested and displayed at the roadside upon sight of vehicles going to a funeral, wedding or other ceremony. The idea is that visitors on their way back will notice the fresh sugarcanes or tubers and buy them at a good price. It is intriguing how members of the homestead internalize the economic value of their produce or livestock as income-in-waiting, since they don’t know when it will be time to convert it into cash. But such opportunities do come.

In many instances, men fatten sheep and goats with their slaughter consciously and quietly timed with public holidays or the sighting of many visitors within the village. I remember one time we passed by a village going to a funeral, and there was no sign of meat in any butcher shop. But on our way back, we could not resist the roast meat aroma coming from villagers’ homes, and we didn’t mind the enhanced price.

Indeed, there are many such examples, from hides and skins used for grain drying but timed to be sold to a dealer who comes twice a year, to tents that are bought and stored to be rented for occasional village events. Market day visits are used to get bargains on store-of-value products that will be liquidated at specific times known only to the income shapers.

More interestingly is how networking is used to sniff out upcoming social, religious or political ceremonies within the village. Local priests, pastors, village elders and sub-chief are all reliable sources, and rewards and favors are easily shared with them to keep the information flowing. Such ceremonies are channels through which income shaping opportunities are liquidated or incomes harvested. Knowing them up front helps people match their assets to upcoming income liquidating opportunities. Bananas ripening will be timed, utensils for hire will be cleaned, chicken, calves and goats ready for market will deliberately be fed along the roadside – all as income shaping opportunities on display.

Ignacio Mas is a freelance consultant focused on mobile money technology and policy. John Gitau is a financial education consultant and trainer, and CEO of Kenya Financial Education Centre.

Categories
Education
Tags
cash, financial innovation, Knowledge, poverty, unbanked