The Poor and Their Management of Shocks
This paper is based on a study that collected quantitative data from 2,459 households in three rural districts of Central Malawi from February to April of 2008. In it, we discuss the welfare-reducing shocks experienced by the sampled households and look at the role of financial services provided by external agents as a coping device during the initial stages of OIBM mobile bank operations. The major foci of this paper include the following:
- What are the major types of negative shocks that affect the rural population?
- How do rural households cope with these shocks?
- How does access to external finance affect responses to shocks?
- What is the role of social networks as a coping device?
The study results are intended to inform OIBM of the potential clientele for its services. Combining this data with the end line data to be collected in 2010 from the same sampled households, we intend to assess whether the presence of OIBM's mobile banking van has increased the use of financial services in the study areas and if financial instruments, especially those of OIBM, are used to cope with the shocks experienced by households.
Below, the major findings of the study, based on baseline data, are summarized to draw implications for the potential role and impact of financial services, especially those provided by OIBM, in managing shocks in rural Malawi.
Major Findings of the Study
A total of 2,459 households from three districts of Lilongwe, Mchinji and Dedza, where the OIBM mobile van was introduced in August of 2007, were randomly selected and interviewed from January to April of 2008. The interviews were conducted using a 31-page structured questionnaire developed for the study and pre-tested in the field prior to the survey.
Among the sample, average annual income was US$182. About 93% of the sample were engaged in farming, while 66% also raised livestock and 44% also worked as wage laborers. Nearly 40% of the sample fell below the poverty line of PPP $2 a day, while only 4% were below the PPP $1 a day poverty line. Only 8% of households were food secure and about 45% of the sample were severely food insecure.
One-third of the sampled households used external financial services. Among financial services users, twice as many households reported an outstanding loan as those that reported using a savings account. Informal loans were much more common than formal loans. Of the total 866 loans, only 152 (17%) were from formal institutions, while 714 (82%) were informal. The most common lending agent was a borrower's friend or relative. Average loan sizes from formal and informal sources were about US$122 and US$14, respectively. Only 343 households (14% of the sample) reported having at least one savings account. The average deposit balance with formal institutions was about US$140, while the average deposit balance with informal sources was about US$29 . Most of the accounts (84%) were with formal institutions.
Remittances were both received and sent. About 320 households (13% of the sample) received remittances from friends and family outside the community over a period of a year. About 316 households (13%) sent remittances to other parts of Malawi, primarily to family members for paying school fees and medical bills. Most of these households were either remittance receivers or senders.1 The average remittance amount received and sent was, respectively, MWK 7,384 (US$50) and MWK 5,769 (US$39). Shocks were very common in the sample. Almost all households in the sample (96%) reported experiencing at least one severely welfare-reducing shock in a year. Over a period of 12 months preceding the survey, 2,339 households reported a total of 7,605 shocks that affected their welfare. This is an average of three negative shocks per household in the study year. Most households experienced between one and five severe welfare-decreasing shocks, with a little more than 20% of all households reporting two shocks and another 20% reporting three shocks.
The most commonly reported shock was the theft or death of livestock and poultry. About 56% of households reported loss of livestock or poultry within the twelve months prior to the interview date. The second most common shock was a large rise in the price of food (47%), followed by illness or an accident affecting a household member (39%).
Three-fourths of the shocks directly lowered household incomes. Most shocks were idiosyncratic, affecting only individual households, but many shocks also affected the community. Food price hikes were the only major shock that affected most of the community, while livestock and poultry loss affected only one-third of the community.
Two-thirds (4,968) of the reported 7,605 shocks were followed by some coping response from the household to try to restore its former welfare level. The four most prominent responses accounted for 91% of the primary coping mechanisms used: spent cash savings, worked more, sold animals, and sold more crops.
Medium-stress coping devices such as savings and loans were used by the majority of the households. Use of cash savings accounted for 80% of all four primary coping devices. These savings were held with external agents and/or at home. While borrowing was listed as a coping device for approximately 80 different shocks, most of these were loans from informal sources. Of the 343 households that experienced shocks and had access to external savings accounts, about 74% used savings as coping devices. Of the 757 households that experienced shocks and that could access loans, only 40% reported using loans as coping devices. While 43% of those who had access to loans reported using savings as coping devices, only 4% of those that had access to savings used loans as coping devices.
High-stress coping devices, such as sale of assets, were also reported in the sample. The average reported value of assets, livestock, or farmland sold in response to a shock was about MWK 5,200 (US$35). Households that used such high-stress coping devices, compared to households using low- and medium- stress devices, owned slightly higher levels of assets in land and houses but also received more cash and food aid from external sources, such as governments and churches. A greater percentage (31%) of such households had current outstanding informal loans than medium- and low-stress device users (25%). They were also less connected with social networks. Households exposed to a larger number of shocks, that had a larger household size, and which engaged in farming, were more likely to use high-stress coping mechanisms compared to low- or medium-stress coping mechanisms.
Households with better access to formal finance and social networks were more likely use low- or medium-stress coping mechanisms than high-stress coping devices that may have resulted in a reduction of household welfare in the long run. Non-coping device users had slightly worse food-security scores and owned slightly lower levels of assets than households using at least one coping device to address shocks. While 32% of device-using households had outstanding loan balances, 27% of non-device users had outstanding loans. They also appeared to have weaker social capital. Increased access to informal savings accounts was associated with a reduction in the likelihood of using a coping device. But access to formal loans or savings accounts was positively associated with the use of coping devices.
Life-cycle events such as births, weddings, schooling, and funerals were common. Three-fourths of the sample reported some life-cycle event occurring during the one-year period prior to the survey date. There were a total of 2,945 life-cycle events reported in the sample, averaging 1.5 events per household. About 95% of the life-cycle events required that households use some of their cash savings to pay for related expenses. The highest-valued asset sales came from costs associated with secondary school fees (MWK 4,000/US$27), followed by funeral rites and weddings (MWK 2,000/US$13). Households with savings may not sell their assets to pay for life-cycle events, but those with loans may deplete their assets to pay for such events.
Can Access to Formal Finance Help Households Cope with Shock?
The above findings show that most sampled households exposed to shocks used medium-stress coping devices that included use of finance, especially savings, including savings kept at home and/or with external agents.
Access to savings was associated more with the use of savings as a coping device than with the access to loans as a coping device. Savings were defined as savings accounts held by the household with external agents currently, and/or in the past two years prior to the survey and loans were defined as loans outstanding for the household with external agents currently, and/or taken in the past two years prior to the survey. Borrowing money, if used as a coping tactic, was almost exclusively from informal sources. The results also show that with increased access to formal finance and social networks, the probability of households using high-stress coping devices declined.
Also, increased access to informal savings accounts was associated with a reduction in the likelihood of using a coping device. But, while not statistically significant, access to formal loans or savings accounts was positively associated with the use of at least one coping device.
It is also notable that about 95% of the life-cycle events required that households use some of the cash savings kept at home or with external agents, mostly formal, to pay for related expenses. Interestingly, asset sales to pay for expenses were only reported by households that did not hold any savings accounts with external agents, formal or informal, although about 30% of these households had an outstanding loan with an informal source.
The study results provide some initial indication that with increased access to formal finance, especially savings services, the use of coping devices to deal with shocks could be increased and irreversible asset depletion, which may lead to reduced household welfare in the long run, could be averted. Also of note is that significant expenses were incurred to pay for education and funerals. These expenses are currently met through cash savings kept at home or with external agents.
What Role for OIBM?
OIBM is a savings-led formal institution that is increasing its presence in the study area using the mobile bank that stops at six trading centers. The majority of formal institutions that mobilize deposits are located in only two of these trading centers, thus offering more market space for OIBM. The savings kept at home could potentially be mobilized by OIBM with appropriate savings products. There is considerable scope for developing short-term commitment savings to meet life-cycle events. OIBM could also develop products that could help households save for education. Funeral insurance introduced by OIBM in September 2008 could help with meeting expenses incurred by such events.
Further inquiry is required to clearly assess the potential of formal finance to help households in rural Malawi cope better with shocks. Additional data from the same households, collected in another year, will help address the issues. Also, a companion study using financial diaries, which captures the cash flows of 200 rural households that are users and nonusers of OIBM finance will help address the role of formal finance, especially products provided by OIBM.
