NB Financial Health

Monday
May 26
2014

Ignacio Mas and John Gitau

NexThought Monday – Liquidity Farming: How the poor cultivate relationships to create sources of future cash

Poor people tend to engage in many schemes to make money materialize. These may be income-generating activities, such as farming, trading, artisanal work or laboring for others. They may be investment activities, such as buying a cow that produces daily milk, or a piece of land that they expect will rise in value. But a large portion of their industry is directed at farming liquidity. This involves cultivating a variety of avenues for getting liquidity, beyond their income and fixed assets, which they can then harvest when they need some extra money to meet daily shortfalls or emergencies.

Liquidity farming entails nurturing potential sources of future liquidity. For instance:

  • spending a little money at the village festivities in order to demonstrate belonging and commitment to the community;
  • occasional conspicuous displays of wealth and consumption which demonstrate success and hence resourcefulness;
  • gifting and participating in communal fund-raising efforts to demonstrate solidarity with kith and kin;
  • shopping regularly at popular stores to build up trust;
  • saving with people in the community, in the form of money guards, or loans to friends or village groups, to build interdependence;
  • buying things that are more easily pawnable or replaceable if they need to be sacrificed;
  • putting cash in a locked box and hiding or giving the key to a friend whom they expect to impress with their determination

All these relationships and resources can be tapped for liquidity, in case of need. For instance, by requesting a reciprocating gift or loan from a friend; asking your employer for an advance and the store for some credit; asking the savings group to allow you to take this week´s pot; or pawning a tool.

The key attraction of liquidity farming is that liquidity can be harvested at any time, on demand. This sets it apart from income generating activities, which tend to have more rigid or uncontrollable cash flow cycles. The liquidity farm is about cultivating a set of lifelines, creating options in case you need to scramble for liquidity at any point. The liquidity farm exists in everyone´s mind, all the time.

The value of one´s liquidity farm is assessed by scanning every person, group, institution and asset one comes into contact with. It´s a complex information-processing task. People might not do it explicitly or even consciously, but they are constantly scanning their liquidity farm to identify opportunities and weaknesses. Their peace of mind depends on it.

Richer people don´t need to farm liquidity so much as track and warehouse it. We benefit from fixed salaries, various insurances and accumulated savings balances, so the need for emergency liquidity is much less frequent. But there is one sense in which we still need to farm liquidity: through our credit score. If we want to build our capacity to borrow in the future, we have to borrow regularly. In this sense, our liquidity farm is mono-crop: growing our credit rating, upon which any creditor will base his or her decision. Our liquidity farm doesn´t exist in our minds, but in a far-away land called big data.

In contrast, most of the elements in poor people´s liquidity farm are not tangible, they are tied up in their notions of community and self-esteem. They can readily imagine value being locked up in a relationship and transferred on a word or a handshake. It is a virtual garden, and as a result people´s sense of money is mostly virtual as well.

This suggests that there need not be any disconnect for poor people as money becomes digital. The trouble is not in digitizing or virtualizing the concept of money, but rather in representing the liquidity farm digitally. How can you expect people to “liquidate” the liquidity farm they have so carefully nurtured, and stick all their money –i.e., all their worries and hopes—into a single digital savings account? There is a huge challenge in digitizing the kaleidoscope of people´s informal financial practices.

It is quite a leap to believe that digital liquidity farms can exist on mobile phone screens. The user interface would have to be partly a social networking site, partly a collectors album of intuitive money pots, and partly a magnet for vivid money stories. A tall order. But while we fail to translate the liquidity farm digitally, don´t be surprised that people withdraw any electronic funds they receive immediately and in full – they will prefer to invest any surplus in their liquidity farm.

Editor’s note: To illustrate the concept of liquidity farming, Ignacio Mas collaborated with John Gitau, CEO of Kenya Financial Education Centre. He shares his insights below.

When I read Ignacio’s post on liquidity farming, it felt like the last piece of a jigsaw puzzle. Looking back on my experiences in Kenya, I recognized many of the tactics he describes in the ways the poor people I’ve known have approached their money and their relationships.

To start with, my memory takes me to Fred, a boyhood friend, now a university professor. He once described to me how his sister would come to him looking for school fees for her three children. He would tell me jokingly, “Back in the ghetto, if you ask my sister how she manages to educate three children, she will tell you it is God. She will tell you how she works hard and how God helps those who work hard. But in her mind, though she can’t tell anyone, I am her God and she prays for my health as I am one of her lifelines.” When seen through the lens of liquidity farming, her reluctance to disclose that support to others makes sense. If she did, she would then lose the credit of hard work, cherished as a virtue that can be farmed and harvested.

That reminds me how my aunties would get wind of my visiting with my mum in the countryside. Upon arrival, they would shower me with praise about how healthy I was looking and what a wonderful wife I had to have taken care of me so well. Now I wonder: could their compliments be liquidity harvesting tools, since I would give them cash at their time of leaving, and my generous mum would share with them the food stuff I had brought? Similarly, it is not uncommon to hear women or men praising their friends to their face, saying, “You see Jacob here, when he has money, I count myself as having money as well. We are like blood brothers.” That may sound like just another conversation, but a favor has been planted and a favor will be reaped.

In many cases, I’ve seen the seeds for a liquidity harvest sown through more tangible means than reputation or words. For instance, at the shopping centers during my rural visits, I would witness a villager calling several people to come and share a small piece of roasted meat he had bought. Not bigger than half a kilogram, he would end up calling five people to have a bite and each would pick not more than a piece before the plate was empty. I am now wondering at what point reciprocity starts and ends. I can’t rule out the possibility that the villager’s generosity is insurance toward future meal invitations from the invited friends. By forgoing some satisfaction today, he may have secured the possibility that the others would invite him to even larger meals in the future.

Men would also announce to their village mates that their cows were about to calf. Such information suggests impeding liquidity, with immediate dividends in the form of favors, such as being invited to share meat or beer. It also makes it easier to invite friends to help in some chores. Those who assist are aware that they could benefit from free milk for the first week as “close friends.”

Women in the villages are not left out. They happily announce to their friends and village mates in advance when their adult children come visiting – especially those working in cities. The children would naturally come with goodies for their mothers, which get shared among friends. The purpose of early announcement is to position the seeking of favors ahead of such visits. These favors can be harvested up front, with the favor-givers expecting to benefit through reciprocal favors – or possibly even through cash, since visitors will always give some money to their mother’s friends who have come to “greet” them. Relatedly, I have witnessed older men remove their hats and bow when greeting young men from the city who would drive to the villages to visit their parents. They would laugh at their stale jokes and even reminisce about how humble the young men were as boys. This always resulted in the young men giving the older men “something small to buy a drink with.”

It now dawns on me that all the episodes I witnessed make sense when seen against the backdrop of liquidity farming. It’s an ingenious system that helps the poor survive with minimal earnings whose inflow is never guaranteed. Or perhaps the preservation of cash achieved through these tactics could itself be equated with earning? It’s easy to hypothesize that to the poor, any money meant for expenditure that is not consumed because there was an opportunity to harvest another favor is treated as income. If a man meant to roast meat at the shopping center but his friend welcomes him to eat with him, he gets to save the money intended for meat roasting. That savings is income ploughed back to other family commitments.

Now that I recognize the extent to which liquidity farming is used, I wonder if the farm could be expanded. Can those of us who work to help the poor support these networks, to help them operate better? Or should we simply step back and leave them to the people who have cultivated and maintained them so successfully without us?

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.

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cash, NexThought Monday, poverty, unbanked