Savings and Investment Needs of Rural Inhabitants

In 2009-10, ACCION International conducted a qualitative and quantitative study of the financial behavior of rural inhabitants in the Dominican Republic, Nicaragua, Ecuador, Colombia, and Peru with the support of the IADB, AIG, and CITI Foundation. The research targeted micro-entrepreneurs and small farmers as heads of households. Here are some of the highlights.

Shared aspirations. We found three key motivations that drove the behaviors and financial decisions of both rural smallholder farmers and micro-entrepreneurs: (1) ensuring the education of their children, which they perceive as important for breaking the cycle of poverty; (2) improving housing to enhance quality of life and build assets; and (3) growing their business or crops as a mean to achieve the first two objectives and perhaps most import as a form of self-achievement (especially among men).

Income differences among rural micro-entrepreneurs and farmers. Both groups have more than one source of income. In our sample, 20% of the second income of a farmer’s household comes from a micro-business while only 6% of the second income of a micro-entrepreneur comes from farming. To augment the revenue they earn from farming, farmers tend to take on occupations that require intense labor such as construction or working for other farmers. Micro-entrepreneurs, on the other hand, take up activities such as adding other products or services to their business line.

A mix of savings and credit finance investments. Investments are primarily made with money saved, though when purchasing very costly assets, credit is also used to top up the lumpy sum needed. Savings and credit are clearly not mutually exclusive. It is possible that savings are such an important source of financing for large investments because the target market does not qualify for large loans.

Investment patterns show that the amount saved is related to the objective for which it is being saved and not to current income. In the sample, investments made with savings ranged on average from USD 300 to USD 3, 800.

The graph below shows the size of the opportunities we found regarding the investments in fixed assets in the target market.

Cash is king. Well, not really. Saving in money is highly valued. But in reality, it is not practiced. Only half of households in the sample had any savings in the form of cash. Micro-entrepreneurs and farmers consider that having idle or “non working” funds is not the best use of their money. Savings are used mostly for investment purposes and are not kept indefinitely in significant amounts of cash.

On the other hand, savings for emergencies (backup savings) are motivated by the need to be prepared to cope with unexpected events which were almost exclusively related to health. In this sense, backup savings are used as a substitute for health insurance. This suggests that if health insurance were available, households might use back-up savings for investment rather than as a form of insurance.

Different savings accumulation methods. Among rural residents who save, very few (12 to 15%) set aside savings before they start to spend. Most of the targeted market saves in reverse: they save what is left over after paying bills and other expenses. Therefore, saving is not always done little by little as, on average, 25% of the sample save from extra income received in one large lump sum, for example from a crop or livestock sale or when they work a whole season elsewhere, making a great personal sacrifice and coming back with a significant amount of cash. Savings by one large, lumpy sum was common in rural markets.

Understanding this sequencing is important for financial service providers wishing to capture savings and develop tailored products.

Taking a closer look at specific client segments to understand their sources and flow of income and expenses and their strategies for investment and savings can help providers develop financial products they meet their needs and complement the solutions they already employ. We answered questions such as: Where do clients come from? What motivates them to save? What is the size of specific segments and needs? etc. This study is one step in deepening our knowledge of rural clients so that we can define better strategies to serve the rural market.

A recent Financial Times article entitled, “Innovators don’t ignore customers” argued that the rapidly dropping share price of Netflix, a DVD rental and online film service could be explained by the fact that the company lost touch with what its customers wanted. Keeping a sharp eye on client demand is thus not only the responsible or developmental thing to do–it simply makes good business sense.