How can developing countries build financial systems that work for majority ?

NOT much research is needed to prove that financial systems in most developing countries do not work for the majority of people and for the environment. To the extent that financial systems are fundamentally urban ecosystems, more than 60 percent of the populations that live in rural areas are not part of mainstream financial systems. Where smallholder farmers connect with financial systems their participation tends to be on-off and ad hoc, depending on seasonality of commodities in which they specialise.

For instance, tobacco farmers in Malawi and Zimbabwe are only associated with financial institutions during the four months of the tobacco marketing season, which means for the other eight months of the year, they are not part of the financial system. It is the same story with cotton farmers in Burkina Faso, Mali and Zimbabwe.

Major challenges like rural poverty, unemployment and structural inequalities have their roots in dysfunctional financial systems which do not give ordinary people a greater sense of control over their money. A responsive financial system should allow capital to flow to places, people and projects that are creating positive impact for society and the environment. There is no doubt that such people are farmers, traders and business hubs. An equal society cannot be achieved through a financial system that keep the bulk of the money in cities at the expense of farming communities where commodities come from.

Financial inclusion = applying lipstick to a frog

Besides being tokenistic, financial inclusion initiatives being promoted are not addressing the fundamental rot at the core of financial systems. Like all other institutions, financial institutions are critical in linking agency with positive transformative change because they structure people’s access to assets and capabilities, and therefore make the difference between development that includes or excludes the poor.

Unless existing financial institutions change their behaviour, products and culture, they are heading for extinction. This includes donor-funded projects that bring money into rural communities without thinking thoroughly about the sustainability of those well-intentioned interventions. Most calls for proposals from development agencies are designed in ways that prevent meaningful funding to reach ordinary people in whose name development financing is mooted.

Rather than forcing farmers into conventional financial systems like contract farming arrangements and off-taker agreements that are no longer suitable for a fluid economy, policy makers and development agencies should direct support where farmers and marginal communities. Initiatives should focus on what smallholder farmers and rural people are capable of doing as well as how they make choices.

Opportunities to address widespread dissatisfaction

To address widespread dissatisfaction, financial institutions like banks have to reinvent themselves in order to win back trust from farmers and the informal economy which is becoming the mainstream economy in many countries. For instance, they have to find ways of removing bank charges that are now a big cost to farmers and other clients, especially those with unpredictable income. The rate at which money changes hands (velocity of money) in a fluid economy dominated by smallholder farmers, SME traders and informal markets means bank charges can eat into income.

The opportunity cost of letting money idle in banks is very high for dynamic economic actors in the informal economy. As entrepreneurs in their own right, smallholder farmers are keen to earn more from their money through spinning it within their ecosystem where investing $100 can ensure they get three times more in three months. Such benefits cannot be earned when money is frozen in a bank. In response, the fluid ecosystem enables those who need money to meet those with money outside banking systems and enable exchanges to happen without going through the bank.

Informal markets as avenues of finance that works for the poor

Fed up with the current financial system in which a few people restrict the circulation of money, farmers, traders, vendors and consumers in informal food markets like Mbare in Harare and those in tobacco auction floors are asking for a financial system that is democratic, responsible and fair.

They are beginning to challenge economic actors to imagine the possibilities of creating a financial system that works for ordinary people, communities and the environment. As reasons for banking money are evaporating, voices advocating alternative financial models are getting louder in ways that position access to and ownership of finance as a right like all other rights.

Recognition of small-scale farmers’ heterogeneity calls for differentiated financial policies. In addition to differing from large farmers, smallholder farmers also differ from one another in their advantages and disadvantages in their market exposure, and in the causes of those advantages and disadvantages. Disruptive innovators that are creating new finance models based on a different mindset, values and purpose are quietly igniting a financial revolution embedded in people’s realities and contexts like informal markets.

On the back of this quiet revolution, economic actors in the informal market are developing a strong sense of ownership of their financial ecosystem and have agency to question or change the system in their favour. It is in these ecosystems that the pros and cons of mobile money are identified and shared. For instance, there is an emerging consensus that mobile money works where farmers and other actors do not have options. That is why many actors would rather get cash at 10-30 percent less than the mobile money or RTGS rate. This means a preference to transact using cash still holds sway among ordinary people.

Toward financial systems that embrace the ecosystem

Instead of trying to promote financial inclusion in isolation, policy makers should look at the whole ecosystem in order to see the true position of different actors like different categories of smallholder farmers. The rigidity of existing financial services, stuck in colonial forms of collateral like immovable property is a huge barrier to inclusion.

Where smallholder farmers would like to use their houses as collateral, houses in rural areas do not have title deeds. As if that is not enough, there is still no proper model for using crops and livestock as collateral. Mistrust and fear from farmers is causing them to push financial institutions away from their ecosystems. Farmers and traders would rather cope with what they have than get into bed with unpredictable financial institutions.