ROSCAs and Mobile Wallet Adoption in Pakistan
Increasing levels of domestic savings is important for Pakistan’s capital growth and development. A recent working paper out of the Harvard Business School shows that domestic savings can encourage local entrepreneurship by providing capital. This kind of domestic investment reflects an endorsement, which then encourages foreign investment – and for Pakistan, this would mean economic growth and an increased government capacity to provide basic services to its citizens.
Pakistan faces a few formative, rudimentary challenges in capitalizing on the impact of domestic savings. The tendency of its consumers to save is limited, and consumers that do exhibit savings behaviors, engage with outlets outside of the formal financial system. Their lack of familiarity with the formal system and the low availability of digital products that facilitate savings restrict their participation.
Pakistan lags behind other countries in the region for savings. Data from the World Bank shows, as a percentage of GDP, the 2013 gross domestic savings rate in Pakistan was 8%, substantially lower than that for India (28%) and Bangladesh (21%). InterMedia’s 2013 FII survey shows 2% of Pakistani adults save through formal or semi-formal institutions, compared with 25% of Bangladeshi adults and 18% of Indian adults.
For domestic savings to be the catalytic element for entrepreneurial capital, there needs to be uptake of these services, preferably through formal savings and bank accounts.
The pathway to DFS, however, can be through an existing informal, comfortable consumer channel.
Leveraging existing behavior to open the door to DFS
Digital financial services (DFS), including mobile money, could be a means for catalyzing greater domestic savings in Pakistan. The mobile banking industry has seen impressive growth in Pakistan since its arrival in the late 2000s. As of this writing, the State Bank of Pakistan’s latest quarterly newsletter found that consumers had used branchless banking to transact more than 370 billion Rupees per quarter. The SBP report indicates, and the FII data confirms, most of the activity is through over-the-counter (OTC) transactions. This means few consumers are opting for account registration, and, therefore, most are making these transactions without the level of consumer protection that registered account holders enjoy. Furthermore, registration is important because it is only through a registered account that individuals can access savings tools and begin to increase domestic savings.
In the Pakistani context, mobilizing a population requires building consumer awareness around the importance of formal savings and bank accounts so consumers can justify registering an account and engaging through a formal channel.
Enter Mobile Wallets
Awareness about the advantages of formal savings and bank may very well be facilitated by pairing a digital component to an existing behavior– like mobile wallets.
The 2013 Financial Inclusion Insights (FII) Survey in Pakistan highlights one such niche — Rotating Savings and Credit Associations (ROSCAs), known as “committees” in Pakistan. ROSCA transactions are generally conducted within a group that is bound together through trust. Every cycle (usually monthly), each member commits an equal amount of money to the collective pot, which is managed by a money keeper. Then, through consent or a random draw, one person gets selected from the group to receive the accumulated money. The group keeps contributing towards the combined pot, until all members receive one payment each.
Based on FII survey numbers, ROSCAs are the top informal channels for saving money– after the option of hiding it at home. Thirty-six percent of respondents saved money, and, of those, 63% saved it as cash in a hiding place, and 33% saved money through ROSCAs.
While the use of ROSCAs is commonplace around the world, its incidence in Pakistan is notably high compared with its neighbor, India. The FII survey in India found, of consumers who saved, only 5% relied on ROSCAs to meet their savings needs. In Pakistan, where formal savings options are not widely utilized, ROSCAs are an important tool.
The demographic characteristics of ROSCA savers suggest that women in Pakistan might be more inclined towards ROSCA savings than men. Currently, women are more likely to use ROSCAs at a 2-to-1 ratio. Similarly, urban Pakistanis are more likely to use ROSCAs than those in rural areas at nearly a 2-to-1 ratio; 16% of urban respondents reported using ROSCAs compared with 9% of rural respondents.
The Digital Component
What if there was a technology available that would complement the existing savings behaviors people are already comfortable with? Instead of asking people to come to a new product that might facilitate their financial lives, the product would go to them. What if mobile money is that product?
Mobile money could go a long way toward easing the constraints consumers currently face as they transact through ROSCAs, including the need for physical proximity. As the FII data shows, 90% of ROSCA users reported travelling less than 1 km to conduct their transactions. This system is based on trust and personal connections, and being unable to contribute to ROSCAs, along with family and friends, may be reducing an individual’s access to finances. Using mobile money, relatives and friends could participate in a ROSCA without living in close proximity to each other.
This idea of using ROSCAs as an entry point for mobile money is supported by ROSCA users’ access to and use of mobile phones. More than half of ROSCA users own a mobile phone and 31% can send and receive a text message without assistance, suggesting technological literacy may not be a barrier.
Furthermore, the eventual use of ROSCA savings to purchase goods could also be facilitated. The FII survey indicates that 19% of ROSCA users use the money for purchases. Qualitatively, participants explained they primarily use the money to make larger, one-time purchases such as air conditioners, refrigerators, or televisions. ROSCA groups could be matched with manufacturers offering these products. Flexible program options and prices for these items could act as incentives for users to adopt mobile wallets. This would require manufacturers to be equipped to facilitate mobile money account transactions.
Mobile money might also mitigate the potential risk members face with traditional ROSCAs. As informal mechanisms, individuals may be more vulnerable to fraud than if they were using a formal financial service. Twelve percent of ROSCA users reported losing money while being in a ROSCA. Whether the loss was due to theft or a breach of trust by the money keeper, both circumstances could be avoided through the use of formal transactions through mobile money accounts.
It would be very risky for mobile money providers to engage in creating ROSCA groups themselves. The primary reason ROSCA members do not default on contributing money after collecting the pot themselves is their personal relationships within the group. Therefore, the focus for mobile money providers should be on facilitating ROSCA transactions through services that could be offered as part of existing wallet accounts such as payment transfers and payment reminders, as well as facilitating purchases.
In Kenya, M-Pesa was successful in doing this through its “Chama Account.” Chama transactions are very similar to ROSCA transactions, but, through their mobile money accounts, Chama members can easily track activities. M-Pesa facilitates interaction among members of the Chama by enabling them to check on the payment status of other members and also the transfer of the collected pot of money to the account of the group leader.
The most significant barrier to this movement might be a lack of trust in mobile money services. Although 72% of ROSCA savers could recall the name of at least one mobile money service, just 44% of this group also expressed trust in the identified service or services. Compared with trust for state-owned banks – 63% of all adults – trust in mobile money services is quite low.
Next Steps: Tackling Trust and Understanding the Consumer
If the trust barrier can be overcome, mobile money services to facilitate ROSCA use could be a major stimulus to increase mobile wallet registration. The use of formal financial services is important to addressing Pakistan’s lack of domestic savings. At the same time, the mobile banking industry needs to meet consumer demand if Pakistanis are going to transition to more formals methods of saving. This requires creating products that appeal to current sensibilities and financial behaviors, such as those of ROSCA users.