By Hélder Buvana, FSDMoç Investment Manager and Anne-Marie Chidzero, FSDMoç Advisor
It may sound secondary to argue for the need of financial advisory services for people living in countries with extreme levels of poverty. It can also sound unimportant even when we have the same argument for those who are in developing countries, but still face many challenges to live a decent life, with minimum access to food and health services. Therefore, should we spend time debating the role of a financial advisor for people at the bottom of the pyramid (BoP)?
Financial advisors can have multiple specialties, but the basic idea is that they will help you invest (manage) your money to reach your financial goals. These goals could include retirement, saving for college, minimizing your tax burden, giving to charity, budgeting, debt reduction, or generating income. Based on the need to help people “reach their goals” and considering that independently of the income bracket one lives in, we all have goals, then yes, there is a role for a financial advisor for the BoP.
In this article, we argue that financial advisors are a critical component of making financial markets work in general, and therefore also in making financial markets work for the poor. We also argue that more attention should be given to providing safe, reliable and qualified advice to allow low-income households and business owners to make the right decisions in managing their scarce resources. This function of the financial market is important in building resilience and improving the efficient allocation of savings for investment and applies for all segments in the income and productive spectrum in the economy.
FSDMoç has applied and is promoting the use of human centre design as a method to designing financial services to meet the needs of rural poor households. As part of our field analysis, we discovered that rural poor households are careful financial planners, balancing sources of income with expenditures, and consulting each other. What if they had better access to financial planning advice? Surely, this would help them improve their household financial returns and livelihoods. For example, advise on how the monthly payments on a solar household system could actually yield financial returns, if the solar kit is used for income generating activities.
Our analysis on the financial market in Mozambique suggests little awareness, availability and use of registered financial advisors, whether at the bottom or in the middle of the pyramid. For example, interviews with over 100 companies during an FSDMoç exercise to build knowledge of capital markets, in partnership with a local investment bank, revealed that majority of senior management of these companies have limited knowledge of the topic. This lack of financial and investment knowledge is not just a challenge for the financial performance of the company, but could be a hindrance to efficient allocation of savings for investment in the country. In general, it acts as a constraint to efficient growth of the real economy and economic resilience of businesses.
We are unaware of licensed financial advisers in Mozambique, but we are clear that people and businesses, are contracting loans with banks, investing in fixed deposits, property, land and other financial products. We have noted that, generally, entrepreneurs seek financial advice from the company accountant – contabilista, who gives guidance on company financial matters, as well as on personal investments of senior managers. The segments of high to medium income groups will normally trust their banker, an educated family member or in many cases, rely on their financial instinct.
Rural communities will trust retailers and providers of services. In many instances, the vendor of an asset will request some indication of monthly budget from a potential consumer, to design an asset finance arrangement that will meet the cash flow of the potential client. This is the model used for instance by retailers selling building material in rural communities. They design a financial product that results in instalments that are affordable and will not present a challenge for the beneficiary, while also reducing the risks to the vendor. Low-income groups also rely on community leaders, elderly people, an educated neighbour or a family member who seems to be knowledgeable about financial issues. We have interacted with clients of pay-as-you-go (PayGo) companies in solar household systems, as well as small-scale cotton farmers and during these engagements, we found that community leaders have strong influence in the decision making of people at the BoP.
The cost of offering financial services to rural communities have been traditionally high, if compared to doing the same exercise in urban areas, mainly due to the challenges associated with the logistics costs to reach these communities. Therefore, some could be sceptical on whether a low-income household would be willing and able to pay a fee for professional financial advice. Our experience working with savings groups show that low-income households do pay for a professional fee when they appreciate the benefits associated with the service. It is however important to consider that digitalisation of the delivery channels (including e.g. the interaction with community animators, call centers, etc.) is playing an important role to reduce these costs.
So there is some evidence of demand for a financial advisory function of the financial market, and potential sub-optimal supply of services to meet this demand. Are retailers, bankers, accountants, wise elderly people, friends and community leaders the best providers of financial advisory services? Although rural communities prioritise trust, over competency, when looking for financial advice, there is huge risk for abuse or misuse if things continue like this. Financial advice should not be an opportunity to sell or influence for personal gain, but rather to serve. This is why the financial and investment advisory services is a regulated sector in developed markets.
FSDMoç is keen to explore this further. As we invest with our partners to apply digital solutions to improve the access of low-income households to financial services, we believe that it is also important that they have access to the right financial advice. With the mobile apps available on the market today, managing your money and making investments decisions has been made easier, affordable and accessible. There is a big opportunity to use digital technology to reach Mozambique’s rural population with better information to manage their scarce resources. This explains why we have embarked in the promotion of a dynamic FinTech ecosystem in Mozambique, which resulted in a partnership with Banco de Moçambique, the Central Bank, for the establishment of a regulatory Sandbox. We want to continue engaging financial tech innovators to come up with ways to reach low-income households and SMEs with financial advisory services, assisting them to meet their life or business goals in a trusted, safe and reliable manner.