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Promoting Inclusive Markets and Financial Systems

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The Sub-Scale Trap: Why Zambian Rural Money Lenders and Savings Groups are Here to Stay

by on Nov 9, 2015  |  posted in Financial Inclusion, Savings  |  1 Comment

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For those that can afford it, Zambia’s capital Lusaka has it all. Billboards on every corner advertise state-of-the art malls, supermarkets and exclusive stores with fancy brands, fast food chains, and a range of high end restaurants and hotels. People going to these places have easy access to a wide variety of financial service providers and mobile money agents. Seven out of ten people living in Zambia’s urban areas are, in the jargon, “financially included.”

But what happens if you drive out of the city on a beautiful tarmac road and decide to veer off onto any of the dust roads? Small settlements are far apart and difficult to reach on sandy tracks. Gone are all the fancy stores and banks at every corner and you might be lucky to find a food stall made up of tin wooden poles holding up a canvas to shade a couple of piles of tomatoes and potatoes on sale.

The economic activity in these areas is marginal at best and cash and barter trade are dominating day-to-day economic transactions. FinScope 2015 shows that 50% of the rural population is financially excluded. What that means in practice is that they depend on borrowing money from friends and family. Others depend on local money lenders, chilembas, and Savings Groups. But the rural population at large is just too poor and geographically spread out to make them financially viable for banks, microfinance institutions, and credit cooperatives to serve.

A lot of promise and excitement has arisen around the emergence of digital financial services as the solution to rural financial inclusion and the promise of a cashless society. While the growth of extensive networks of mobile money agents has greatly improved rural financial inclusion in countries like Kenya, the effect has been limited to urban financial inclusion in other countries. The main reason why digital financial services have not taken off in rural Zambia is the sub-scale trap. Retail mobile payment systems require scale to get off the ground and struggle to grow incrementally to overcome the chicken-and-egg problem of acquiring both customers and merchants. To overcome these barriers, they must create enough urgency in customers’ minds to learn about, try, trust, and use the service They must also ensure that there are enough cash-in/out merchants adequately incentivized to promote the service.

In Zambia, rural populations in sparsely populated areas will remain dependent on the local moneylender or community-finance chilembas and Savings Groups. These informal community structures are self-selected, managed by the members themselves, and help people save money on a regular basis in groups of 15 to 25 people. This allows them to build useful lump sums and provide capital for inter-lending. These mechanisms and support for Savings Groups from organisations such as Financial Sector Deepening Zambia will drive increased rural financial inclusion for years to come.

These challenges will be the focus of the SG2015: The Power of Savings Groups Conference, taking place from November 10 – 12 in Lusaka. Those of us in attendance won’t have a problem accessing financial services, but for Zambia’s rural poor, there is still a long road to travel.

Guy Vanmeenen is Head of Rural and Household Finance at FSD Zambia. Guy is a member of the SG2015 Advisory Committee. For questions on the work of FSD Zambia, please contact Guy at Gvanmeenen@fsdzambia.org.

1 Comment

Christabel says:
Dec 12, 2015

How is it that this conference was not publicised much for a larger population

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