Kishore Biyani has observed that while brands are able to establish an emotional connection with the Indian (or any) consumer, only the availability of customised credit or financial products provided by the market for the consumer (especially in the informal sector) will make things happen and the market really grow. [i] Extend this from the consumer to the producers and the need for more imagination and viable options from the Financial markets is clear.
Many studies of the financial realities of the informal sector highlight the consequences of poor access to regular funds. In 2006, an Indian based think tank, the Scientific Research for Economics and Finance (SRA), completed a survey of more than 1,500 street traders, laundries and other informal operators in Chennai. Sample respondents were asked about their financial resources: 34% used money lenders and 7% used pawn brokers. Interest rates were over 75% though respondents believed they were paying only 10%. However, 97% of the respondents highlighted that they had to use these means to raise cash because the regular banking system did not recognise them as viable customers. The study describes this as Financial Apartheid.[ii]
The work of De Soto and C K Prahlahad explores such apartheid in great depth.
The SKS smart card project is a microfinance product catering to small time farmers and labourers from the informal sector. SKS provides loans of $100 or less. So far it has loaned about 357 million to more than 200,000 people. In partnership with ICCI Bank, they have set up automated teller machines and rural Internet kiosks. They have created a network of 8,000 self help groups, each with 20 female members, to build microfinance business.
Biyani’s Future Group is India’s largest Retailer and, with their 60 different retail formats they cater to all sorts of Indians in a number of diverse backgrounds. However, in seeing consumption as the key to development, the Future Group pay great attention to expanding the capacity to consume and this means providing the credit to purchase items. This is a virtuous cycle between consumption and growth. In this they have learned from elsewhere and implemented it with a unique Indian twist. For example, Casas Bahia of Brasil, a family owned business started more than 50 years ago by German refugee Samuel Klein, have successfully developed a model that serves the poor. With 4.2 billion reals (the brasilian currency) annual revenue, 330 stores, 10 million customers and 20,000 employees Casas Bahia has made a success of selling into the poorest areas of the country. Eighty per cent of the population of 184 million are at the Bottom Of the Pyramid and yet, 45% of total appliance and furniture spending is made by this empoverished group. It is not uncommon to find households in the favelhas with television sets and fridges yet lacking basic amenities such as toilets. Financed sales represent 90% of all sales and are paid back over a 15 month period through the carnet or pass book system. Casas Bahias default level is 8.5% which compares favourably with the entire retail sector at 6.5% and this is largely down to the perception that the customer – even at the Bottom of the Pyramid – is not a transaction to be wary of but a customer for life. New purchases are allowed when payment reaches 50% of the value of the initial purchase. [iii]
In Latin America credit card circulation is having an impact on purchasing of white goods since this mode of payment provides a line a credit that cash transactions in the informal economy do not. This is a variation on the successful Casa Bahia model.
Finance has to keep pace with the real issues. For example, the leasing of equipment instead of outright purchase can help a company to expand or a community to have access to equipment that can be shared. For example, in the dairy industry a group of farmers could lease purchase vital equipment and use this to improve productivity and profitability. Leasing as a concept started in Mesopotamia, modern day Iraq, 4000 years ago. [iv] And yet, whilst it is common in the West it has poor penetration in emerging markets where it is most needed.
[i] Kishore Biyani, A paradigm shift. Chapter 8. India 2008, Business Standard. P.207
[ii] Scientific Research Association for Economics & Finance (SRA), Study on Financial Apartheid. (June 2006)
[iii] C K Prahalad, The fortune at the bottom of the pyramid (2006) pp.159 to 167.
[iv] Ancient History Sourcebook, A collection of contracts from Mesopotamia, c 2300 to 428 BCE.