Consumption smoothing and life cycle hypothesis in microfinance
I recently wrote here that microfinance without microinsurance was bound to fail the poor when they need help the most. I made reference the flood disasters that occurred sometime ago in some South-East Asian countries, which consumed the crops of many poor farmers. The only way out, it seemed to those farmers, was the mass suicide they committed following their inability to face their microcredit lenders after the flood destroyed the crops they used the loans to cultivate. I rested my case by saying that microfinance will succeed more if it recognizes that the key to its sustainability is not the provision of microloans but the promotion of ancillary and mostly non-credit services that give fibre and add value to its attack on poverty.
It is easy to see microfinance simply as a means of canalizing credit to the poor. Indeed, that is good for a working definition but microfinance of today is probably much more of credit-related services than pure credit itself. And this is not hard to figure out. Take for instance the several parts of Nigeria that are being clawed away from the main body by all manner of divisive forces. Such areas include the North-East that has literally become one huge camp for Internally Displaced Persons, the South-East that is one huge camp of unemployed graduates, the South-South – a mass of farmlands destroyed by a heartless extractive economic system, as Professors Acemoglu and Robinson would say in “Why Nations Fail”; and the South-West gradually sliding into a den of ritualists and kidnappers.
These people surely need credit to restart or pick up their lives, assuming we can secure them to prevent reoccupation of their homes by Boko Haram, reduce the sources of agitation and allow them to engage in economic activity. But they probably need much more than credit. They need psychological and sociological restoration. Making financial resources available to the poor is a means to an end. It is not the end itself. It does appear however, that most operators do not see the value of ancillary activities that incidentally promote the value of the credit granted to the poor.
Operators need to appreciate the fact that their role in building a better society at best begins with credit availability but that certainly, is only the beginning. It extends to other activities that actually enhance the value of credit. And this role, rather than diminish the profit objective, actually promotes it. Until operators begin to attach more importance to the hidden but equally important roles not hyped on a daily basis, the objective of poverty reduction may continue to be a mirage. Some of these other activities that actually bring sustainability to microfinancing are savings and insurance, just to mention but two.
As far back as 1957, Franco Modigliani, an Italian American professor at Carnegie Mellon University and MIT, who won the Nobel Prize in Economics in 1985, discovered that consumption is a function of both income and wealth, and not just income as previously stated by Keynesian economics. He noted that households do not like their consumption pattern disturbed by the unavoidable fluctuations in household incomes. They want some stability – some kind of smooth consumption curve over their lifetime. He therefore proposed that over the lifetime of individuals divided into early life (unemployed), mid-life (working) and old age (retirement), saving and consumption should be structured in such a way as to keep consumption stable by saving substantially during working life. This savings will be used to pay debt (college loan) acquired during early life and to smoothen consumption during retirement. This is the gist of the Life-Cycle Hypothesis.
The whole idea is rooted in the Marginal utility theory as it relates to income and wealth (savings). If income is high during working life, its marginal utility will be low and declining, so it makes sense to save a lot of it at that time. Moreover, it is harder to work and earn income during old age. This theory has been confirmed to apply to 75 per cent of people who plan their lives. It should be applied to assist the poor. Promoting saving will stabilize family consumption and offer the peace of mind that will motivate them to work.
Consumption smoothing should be one of the low-hanging fruits on the way as households walk to exit poverty through their economic activity. It is wise to focus equally seriously on some of those low-hanging fruits as we try to deal with the scourge of poverty. This point becomes more germane as the effort of those working to improve living conditions in Nigeria is hampered by insurgency, discontent, and poor leadership, evidenced by despair that greets Nigerian once election euphoria settles. This has been consistent, irrespective of who is elected.
Operators must return savings to its prominent position as an agent of household consumption stability. It might not be easy to drive but savings products are a welcome service to the poor and a source of sustainability for the operator. This is even more important now that we cannot sincerely expect a reduction in our poverty level given that more people are thrown into the murky waters of lack and pain every day as Nigeria struggles with insurgency and a political structure that neither motivates nor inspires.
Emeka Osuji