Beyond Access and Usage: Financial Services for Livelihoods

This post is also available in Arabic, French and Spanish on the FinDev Gateway.

“Work is at the core of human dignity.” 
— Leila Janah, social entrepreneur

When CGAP transitioned to its current five-year strategy back in 2018, we placed at the very top of our theory of change a vision statement for our work and in 2020 added an emphasis on women: “A world where poor people, especially women, are empowered to capture opportunities and build resilience through financial services.” In other words, we explicitly moved beyond the access and usage paradigm of financial inclusion, toward a framework that focuses on ensuring financial services meet the varied needs of poor people.

This shift is not trivial. Focusing on outcomes like capturing opportunities and building resilience potentially leads to different approaches than signing people up for accounts. It requires us to understand what poor people need and then define the best solutions -- whether publicly or privately provided, digital or analogue -- to help them meet their needs, and to constantly reassess whether those solutions are working. But “opportunities” and “resilience” are fairly abstract concepts. To better focus our work, we decided to define three areas where we believe new learning about digitally enabled financial services could play a meaningful role in improving the lives of the poor: the ability to generate income, gain access to essential services and protect basic standards of living. Although COVID-19 took us on a partial detour from this transition, we were able to make significant progress in 2020 toward defining our approach in the first of these areas: income generation.

While developing our current strategy, we analyzed issues like the changing nature of work, migration and the many dislocations that technology was creating in our lives. Time and again, our discussions took us back to livelihoods and microfinance — areas that CGAP has focused less on over the years. I can remember feeling some discomfort with this. It seemed to many of us that we were returning to old territory, where we had already done so much work. But eventually it became clear that not only have financial services changed dramatically in the last 30 years, so have the ways people earn a living. Globalization, demographic trends, climate change, technology — all of these factors are changing people’s livelihoods. And if there is one thing that is central to people’s needs, it is the ability to earn a stable income. 

In this essay, I’d like to share with you some of the findings from our initial research on livelihoods and why financial services continue to matter in helping the poor create income-generating opportunities. I’d also like to share with you how CGAP plans to focus its work in this important area. For those looking for more detail, I would highly recommend the landscaping paper by DAI that helped shape CGAP’s thinking on this complex topic.

The changing nature of livelihoods

In the 1990s, the U.K. Department for International Development launched its Sustainable Livelihoods Framework. This framework recognized the complexity of supporting livelihoods, highlighting that an individual’s options and opportunities are based on many forces and circumstances: where they live, who they are and what services they can access to improve their situation. At the time, most livelihoods programs focused on rural areas, and rightly so. Half of people living in low- and middle-income countries (LMICs) and a large majority of the world’s low-income households engaged in farming as their main livelihood activity. As a consequence, livelihoods programming focused on making family farms more productive and supporting microenterprises as a means to help them diversify income and risk.

But the world was on the cusp of tremendous change that included economic liberalization, opening borders and a technology boom. These economic changes caused significant demographic change, as millions of people migrated to cities in search of work. Between 1990 and 2020, the population of LMICs grew by 50 percent, with most of this growth concentrated in urban areas. In the same period, the percentage of people engaged primarily in farming declined by nearly 10 percentage points in Africa, 20 percentage points in South Asia, and 25 percentage points in East Asia. In Asia, part of this migration was due to the draw of new manufacturing jobs, primarily in China, but also in poorer countries like Bangladesh. Manufacturing doubled in Asian LMICs to slightly more than 20 percent of all employment before leveling off in most countries in the past decade and declining in several. In Africa, industrial jobs in large- and small-scale manufacturing failed to materialize, providing only 10 to 11 percent of all employment in Africa, unchanged since 1990.

While livelihoods in agriculture shrank and jobs in manufacturing plateaued, livelihoods in services grew dramatically. Expanding urban populations catalyzed the growth of a diverse services sector, including commerce and transport, as well as social, health, ICT and financial services. Services now employ 24 percent of South Asians, 36 percent of Africans and 46 percent of East Asians — gradually approaching the global average of 51 percent. The growth in services is likely to continue, and this is particularly important for women’s livelihoods. Globally, 57 percent of women work in the service sector, compared to 47 percent of men. Statistically, the decline in agricultural employment overall is closely linked to a rise in women’s participation in the workforce, particularly in service jobs.

Underlying any discussion of work is the topic of productivity and how to grow it. The case for focusing on increasing productivity is strong: at a macroeconomic level, increases in productivity are closely correlated with rising incomes and poverty reduction. But productivity matters at the household level too. If people have choices about where to deploy their labor, they can seek opportunities that best maximize household income. At both the individual and household levels, there is strong evidence that increasing productivity is linked to improvements in well-being, as measured by increased consumption, accumulation of productive assets and decreased economic insecurity due to unemployment, illness, single parent poverty and poverty in old age. So, from micro to macro, productivity is an important driver of growth and enhanced prosperity.

But the productivity conversation often focuses on formal, growth-oriented enterprises and their role in job creation. It fails to acknowledge that many people in emerging markets and the majority in the least developed countries earn their living in the informal sector. Among micro and small enterprises, gains are often due to new firms starting rather than firms expanding. And this is not unique to emerging markets. According to the US Small Business Administration, almost 50 percent of jobs in the United States are in the small and medium enterprise (SME) sector, accounting for 67 percent of net new jobs created, of which 40 percent are created by churn – the dynamic closure and opening of small businesses. Broadening the discussion of donors and governments on boosting productivity and jobs beyond SMEs to include individuals and microbusinesses would better reflect the true opportunities for job creation in emerging markets.

How should we think about financial services in this changing world of livelihoods? Let’s take each of these sectors — agriculture, manufacturing and services — and explore the ways in which they intersect with an increasingly digitized financial sector.

Rural and agricultural livelihoods

Agriculture is critical to rural areas and the well-being of people living in poverty. In low-income countries, more than five out of six people live in rural areas. Most of them work in agricultural value chains, whether in farming, processing, manufacturing, transportation, distribution, sales or preparation. While agriculture plays a powerful role in rural areas, non-farm activities are important too.

For many smallholder households, livelihoods are increasingly diverse. They blend income from their own agricultural production with on- and off-farm employment, remittances, microenterprises and social protection payments. The increasing diversity of income streams in rural households has three important implications. First, some households will become less dependent on their farm’s productivity and income. Second, households will be increasingly able to compare their income options: How does the income from their own agricultural production compare with wages from working on a nearby farm, or in town at the processor? Agricultural production may remain an important source of income and identity, even as it becomes less predominant in the overall family income mix. And third, the incentives for households to continue their agricultural production may weaken over time. Other income sources may take precedence as opportunities present themselves and a new generation enters the workforce. 

These changes in rural and agricultural livelihoods are being shaped by several forces: globalizing value chains, innovations in digital tools and technology, a young generation hungry for new job opportunities, and a changing climate that is sparking conflicts and displacement. 

“Digitally enabled services and platforms are offering many small-scale growers new opportunities to engage in agriculture.”

Digitally enabled services and platforms are offering many small-scale growers new opportunities to engage in agriculture. They allow users to access high-quality seeds, fertilizer and advice; finance purchases and make payments; find laborers; negotiate with buyers; and tuck away savings. These new bundled services complement — rather than replace — more traditional rural village savings and lending associations (VSLAs) and cooperatives, which also offer saving and borrowing opportunities along with shared labor and expertise, joint purchasing of inputs and livestock, market aggregation, and access to shared storage facilities.

Such combinations of financial and non-financial services help rural households capture opportunities and build resilience in ways that financial services alone cannot. Bundled approaches can more easily address the persistent pain points of rural households, including the cost of storing, refrigerating and transporting crops, and even financing a solar home system and paying school fees – all of which are linked to financial services.

Increasingly, these services are being digitized. Digitally enabled firms and platforms that bundle financial and non-financial services, such as DigiFarm, Cellulant and Hello Tractor are building greater efficiency and affordability in agricultural value chains and related services. This is a new frontier in developing vibrant, resilient rural and agricultural livelihoods.

Manufacturing

In aggregate, workers in manufacturing across LMICs still earn considerably more than their farming counterparts. But the shift to manufacturing work across most LMICs, particularly in low-income countries, is not from farms to factory jobs. Instead, most manufacturing jobs are in micro, small and medium enterprises (MSMEs) — small workshops that make construction materials, tools and household items for local use. Overall, employment, productivity and income levels in the manufacturing sector are peaking at much lower levels in LMICs today than they did in earlier industrializers like China.

 These small manufacturers in LMICs lack the economies of scale to compete with larger firms that have invested in cost-saving technology and mechanization and which have the infrastructure to be part of global supply chains. Unlike small farms that can actually be more productive than their larger counterparts, it is extremely difficult for small manufacturing firms to compete with large ones due to their higher cost of inputs, lack of technology and difficulty in meeting the requirements to link with national and global value chains. Manufacturing may no longer be a reliable pathway to growth for many emerging markets, but small manufacturers are a means of sustaining livelihoods. Among the smaller manufacturers, where lower-income manufacturing jobs are concentrated, there are a number of other market-level binding constraints, including a lack of reliable electricity, poor infrastructure and high transport costs. 

There are some hopeful signs for small-scale manufacturing that have less to do with financial innovations and more to do with using technology to access markets. A survey of small-scale manufacturers in India found that 93 percent learn about new technologies on the internet. This compares with 31 percent who rely on associations and 34 percent who rely on friends, which used to be the only way to source information just a decade ago. During the pandemic, some of these manufacturers downloaded personal protective equipment standards, found patterns for masks and pivoted production to meet demand and keep workers employed.

“Some platforms used by small manufacturers to connect with buyers have benefited from financial innovations, particularly digital payments and credit.”

Our own research on the use of social networks for informal e-commerce shows that it is helping local producers to market themselves to local consumers — particularly women. Some platforms used by small manufacturers to connect with buyers have benefited from financial innovations, particularly digital payments and credit. E-commerce platforms using digital payments, such as Etsy, Amazon Handmade and Flipkart’s Samarth, are linking artisans with buyers of the kinds of goods that dominate LMIC manufacturing, including handicrafts, clothing, jewelry, art and household items. Increasingly, they are also offering credit to established vendors that sell over their platforms.

Financial services are increasingly embedded in platforms where small manufacturers congregate to sell their goods and lenders can assess credit risk based on sales data, but there remain important gaps. The need for financing is particularly acute for more capital-intensive manufacturing. Unfortunately, there is little evidence that financial services are solving this problem. Small manufacturers often require a range of specialized equipment and materials, which makes it challenging to develop scalable or replicable financing solutions.

There is one bright spot in financial innovation for capital-intensive manufacturing enterprises. In Latin America and parts of Asia, electronic invoicing combined with enabling regulation is giving rise to platform-based factoring. This short-term financing based on invoices and purchase orders provides faster, cheaper and more reliable working capital to manufacturing SMEs while they wait to be paid by larger firms and government clients. More solutions like this are needed to address the significant constraints that small-scale manufacturers face in financing equipment, materials, electricity and transport.

Services

The services sector traditionally lags behind manufacturing in terms of productivity and income levels, but it is becoming the most viable alternative to working on the farm in many emerging markets. And it may be catching up with manufacturing in terms of productivity too. In Asia, there is evidence from larger countries like Malaysia and India that technology and innovation in the service sector is propelling the productivity and income gains of service workers beyond those of their manufacturing counterparts. A study in four African countries of low-income workers found that service workers actually earned more income per hour of work than those in manufacturing. They also work more consistently year-round and more hours on average per week, which makes service jobs more attractive than work in any other sector. While the overall economic productivity picture is not yet completely clear, at a household level working in services increasingly presents a better alternative – and for many the only alternative — to staying on the farm. 

As with manufacturing, the growth of these service jobs is largely in micro and small businesses in the informal sector. A look at country level data on MSMEs is revealing. On average, 70 percent or more of MSMEs are engaged in services, and a large majority of those are engaged in retail commerce: 75 percent in the Philippines, 69 percent in India and 70 percent in Kenya. In those same countries, more than 90 percent are microenterprises with 10 or fewer workers, and most of these are considered to be “informal.”

“New digital financial models have the potential to help bridge the MSME finance gap, but they have not yet proven their reach and staying power.”

Financial service providers have sought to provide mass market solutions to retail microenterprises for decades, offering products to smooth cash flow, finance inventory and ideally secure better wholesale prices in the process through bulk purchasing. But they are barely scratching the surface on demand. While microfinance has grown into a $124 billion global industry, the IFC estimates that the financing gap for MSMEs is around $5 trillion in emerging markets. MFIs have demonstrated the ability to financially sustain themselves, but very few have reached significant scale. New digital finance models have the potential to help bridge the MSME finance gap, but they have not yet proven their reach and staying power. And there is much learning that needs to take place between traditional microfinance and new digital models.

Continuing to focus on inventory finance does make sense. Studies show that retail microenterprises have fixed locations, limited space and are price takers in competitive markets, all of which makes reducing the cost of inventory paramount to increasing income. A study in Kenya found that 40 to 60 percent of microenterprises’ costs were due to carrying inventory. 

But financing could be more effective if it were bundled with other services and technologies to help MSMEs to manage their suppliers, inventory, retail space and customers, ultimately leading to greater productivity. There are some promising signs that technology and financial services together can address these challenges holistically. More and more services are linking inventory replacement and financing to sales data. One example is AwanTunai, which helps shops in Indonesia record their inventory and monitor transactions, and then uses this data to link them to suppliers and financing from banks. Merchant acquirers like Kopo-Kopo in Kenya and Yoco in South Africa both have credit models that lend against sales for merchants accepting digital payments. And large e-commerce platforms are providing more customer management services that integrate marketing with ordering, payments and logistics services to help small retailers expand into the digital market and build customer loyalty.

CGAP’s new livelihoods agenda 

As CGAP sifted through decades of findings on livelihoods programming, we decided we needed a clear definition of what livelihoods means in the modern context. We chose to define it as “individual or household income obtained in return for labor, investments and/or services, or as the result of social and/or familial benefits.” This definition recognizes the complexity of how people earn incomes in the informal sector in a rapidly changing and digitizing world. It will also help us think about the complex interplay between income generation and resilience at the household level. 

Our initial landscaping research has led us to focus our work on livelihoods in three main areas:

• Rural and agricultural livelihoods. Since most poor people live in rural areas and 40 percent of the global population has a livelihood linked to small-scale agriculture, rural and agricultural livelihoods will remain central to economic and financial inclusion and to CGAP’s work. At this crowded intersection of food and financial systems, CGAP is focusing on women, who tend to be more marginalized, poor and digitally excluded. Our work emphasizes the role that financial services can play in helping women increase their returns to labor, including labor they hire, save through mechanization, and provide in paid and unpaid work. It also emphasizes how financial services can improve women’s access to markets, both locally and through digital platforms. As the global pandemic and locust swarms of 2020 reminded us, building resilience is as important as capturing opportunity. A range of risk management tools and safety nets can position rural households to invest in more productive activities and protect their hard-fought gains. Relevant solutions will also need to address prevailing social norms, bundle services to meet a wider range of customer needs at lower cost, and leverage digital tools and data in more inclusive ways.
   
• Micro and small enterprises (MSEs). MSEs create most of the jobs available to people with low incomes worldwide. We are exploring opportunities to improve the delivery of financial services to MSEs in ways that enhance the livelihoods of their owners and employees. With incumbents in the financial sector like microfinance institutions, we are taking a fresh look at successful pathways to digitization. We’re also exploring how fintech firms may disrupt the way MSEs access financial services. Underpinning all of this work are our efforts to better understand MSEs themselves, what their fundamental needs and goals are, and how financial services can help meet them.
   
• Platforms. Nowhere is the dynamic change in the way poor people work more obvious than in the small but rapidly growing world of platform-based work. As platforms host markets allowing people who have things (physical goods, crops, services) to connect with people who want them, millions of platform workers have leveraged platforms to access customers and receive payments for goods sold and services rendered. Although platform work opens up new paradigms for income generation across all three sectors, the vast majority are either selling physical goods or providing services such as logistics, ride hailing or home and personal services. However, the COVID-19 crisis has highlighted the increasing vulnerability of most platform workers. There are growing calls for platforms to provide decent work, including a fair income and basic benefits. CGAP will explore how financial services can help platform workers capture opportunities and mitigate some risks. Portable benefits across platforms could help workers find stability and a safety net.

In closing, we recognize that a livelihood is not just about being a productive farmer, worker or entrepreneur — it is also about having a productive life. Improving livelihoods is about enabling choice among livelihoods pathways. Capturing opportunities and building resilience requires financial services that are not solely linked to a particular livelihood but can be used to help people acquire the skills they need to advance and adapt, and to build the assets they require to manage transitions and be resilient when faced with setbacks. That brings us back to the importance of flexible, affordable and portable personal finance options and a need to understand how financial services are making both these life and work transitions possible. Given how often people are likely to change what they do and where they do it, we need to continue to promote retail financial services for individuals that follow them along their journey.

As CGAP digs more deeply into the ways innovations in financial services intersect with the changing nature of livelihoods, we will have more to say on both the opportunities this new paradigm presents but also some of the risks, particularly in embedding finance into other services. Rather than being a throwback to the 1990s, we are excited about the possibilities the digital economy and digital finance bring to advancing income-generating opportunities for low-income households in the 21st century.

Greta Bull is CEO of CGAP. Till Bruett is Global Practice Lead, Financial Services and Investment at DAI. He and his team produced the landscaping paper that helped shape CGAP’s thinking on livelihoods, and contributed to early drafts of this essay.