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EXECUTIVE SUMMARY In 2014, Microfinance Opportunities (MFO) was commissioned by Financial Sector Deepening Zambia (FSDZ) to implement the Zambia Financial Diaries, a year-long study that examined how low-income individuals in Zambia managed their financial lives. A team of field workers interviewed 355 respondents on a weekly basis, collecting data on all goods or services that they bought, sold, or traded; the financial tools they used; and whether any important events occurred in their lives that week. In addition, MFO used cross-sectional surveys and in-depth interviews to understand respondents’ attitudes toward asset building, risk management, and financial service providers. The respondents lived in four provinces in Zambia—Copperbelt, Eastern, Lusaka, and Western Provinces. Sixty percent of the sample was female, and the average age of the sample was about 38 years old. The most common way in which respondents earned money was through the management of a micro-retail business, and about 60 percent of respondents reported living in a household where at least one person was farming. A summary of the major findings follows. Financial exclusion • Most respondents in the sample rarely if ever used formal or informal financial services. Using the FinScope definition of financial exclusion, 1 we found that 41 percent of our sample was financially excluded, having used no financial service throughout the study. Another 16 percent of our sample only transacted with a financial service provider (FSP) once or twice per year. • Respondents’ preferred financial tools were saving (in the home) and cash transfers (with friends and family). • In cases where respondents did use formal or informal financial services, they tended to use a variety of different providers. As the intensity of their use increased, they did not shift from informal financial services to formal financial services. In other words, respondents who used formal financial services also used informal financial services; the use of the former did not displace the latter. • In-depth interviews with 32 respondents revealed two major themes that explain why respondents did not use financial services. o o First, respondents expressed a strong distrust of financial services. Specifically, respondents did not always trust service providers to act in their best interests, and respondents did not always trust their own community members to act responsibly. Second, respondents’ views showed that they operated on very short time horizons. Respondents focused more on living week-to-week than they did on planning for the future. Cash flow management and lump sum purchases • Nevertheless, respondents came across as savvy economic actors in the in-depth interviews, having clear strategies for how to generate earnings in a complex and uncertain environment. • Many respondents’ income was not covering their week-to-week spending. Looking at weeks in which respondents experienced a deficit, we found increased usage of home savings and cash transfers, suggesting that respondents were using these tools to cover their expenses during weeks they experienced a short-fall. 1 FinScope defines financial exclusion as, “not using any formal or informal financial service in the past 12 months.” FinScope also found that 41 percent of a nationally representative sample were financially excluded. Go To Menu 1

• Respondents whose week-to-week income varied the most were the most likely to use financial tools (including saving at home, cash transfers to and from friends and family, informal financial services, and formal financial services) to smooth their consumption. • Respondents made an unusually large purchase about once per month, on average. They reported funding these purchases predominantly through income Åearned that week, home savings withdrawals, and cash transfers from other members living in the household (intra-household transfers). Risk management • Respondents reported a number of infrequent or unexpected events, such as births, weddings, funerals, and medical issues: o o o o A review of case data suggests that there was an impact of childbirth on a woman’s ability to earn a living. There were 38 weddings reported during the study period, and these instances resulted in increased earnings and spending in the week preceding the wedding and the wedding week itself. Funerals seemed to have had no impact on earning or spending, despite their frequency—168 respondents reported a funeral during the study period. Illness had a negative impact on earning and spending during the week of the illness and the week after. There was no discernible change in the use of financial tools during this time. The findings from the Diaries study suggest that those who participated in the study lead complex economic lives and used financial tools to manage their money from day to day and week to week. The data suggest that the financial tools they used were largely based in the home in the form of home savings or intra-household transfers, or provided by friends and family. Transactions with FSPs were limited. Based on these findings, we propose that stakeholders interested in increasing financial inclusion within Zambia should adopt a two-pronged strategy. First, stakeholders should focus on identifying cost-effective ways to get cash into the hands of the poorest Zambians. The data suggest that very low-income Zambians struggle to make ends meet, forcing them to rely on cash transfers from family to survive. A cash transfer program that uses the extensive mobile money and bank agent network in Zambia could have a profound impact on the lives of low-income people and get them acquainted with the formal financial service system. For those individuals that are low-income but regularly meeting their expenses or have small amounts of discretionary income, FSPs should focus on building trust with their prospective customers. The lack of trust between potential clients and FSPs appears to be an important barrier to use. Rather than use FSPs, respondents have become self-sufficient or rely on friends and family to help manage mismatches between their income and expenditures. 2 Go To Menu

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