Coping Strategies of Financially Distressed Households
deteriorating food security, which we wrote about in a previous blog post, financial health can be negatively impacted as families resort to different financial coping mechanisms to deal with reduced income. During the pandemic, savings were the first and most important recourse for households, but they were often not enough to sustain daily consumption. As a result, some families took on more debt and sold their assets, leaving them more vulnerable to future shocks.In addition to
Using FINCA survey data, which covers 11,000 households in 13 countries, we created models for each of these three financial coping strategies (drawing down savings, borrowing and selling off assets) and the underlying risk factors, to see which people have the highest potential to rebuild their savings for future resilience. Using supervised machine-learning classification and regression trees, we were able to create profiles that were associated with each type of coping strategy. To varying degrees, these coping strategies left families in an economically weakened state and therefore more vulnerable to falling per capita incomes and global inflation.
Using Savings to Purchase Daily Necessities
The most common coping strategy – and presumably the least painful one – was using savings to buy necessities, which was reported by 58 percent of clients. Studies show that people who save are better able to pay their bills on time, feed and support their families and even earn more over the long run. Our analysis shows that people who used their savings to supplement lost income were mainly business owners and regular salary earners. Interestingly, four out of five people with enough savings to absorb financial shocks were women with higher education, who tend to have better saving habits.
Borrowing for Consumption
In response to lost income, a third of FINCA clients borrowed money for daily consumption. But this short-term strategy comes with the cost of more debt and interest. Consumption loans were more prevalent among people who lacked strong savings habits. They were also more common for people with stable jobs and access to credit (56 percent), especially wage-earning men in urban areas (70 percent). The Global Findex 2021 survey paints a very similar picture: only about half of adults in developing economies could mobilize resources within a month if faced with an unexpected need.
Families who cover their daily expenses with consumption loans are putting their future at risk by going in to debt, particularly as credit is becoming more expensive due to rising interest rates. Often, these households struggle to put enough food on the table, so they will clearly have trouble paying their debts.
Selling off property
Selling off assets was the last and likely most painful coping strategy. It was employed by 24 percent of FINCA clients, especially those who work in agriculture and have no other income. This is the only coping strategy that was explicitly associated with poverty, reaching 43 percent of those who were poor and dependent on agricultural incomes. There was also an age dimension to this strategy, being more prominent among those over 40 years of age. However, due to its relative infrequency among our clients, and limitations in our data, this model for selling off assets can never go above a 50 percent predictive power, while the models for savings and borrowing reach 81 and 70 percent, respectively.
One of the main disadvantages of this strategy is that people facing hard times will most likely accept a lower price for their hard-earned assets, and then have to pay more to replace them later. A family that has effectively consumed their capital during a crisis isn’t only poorer and less resilient – their future is more precarious as well.
A Stronger Willingness to Save
A continued slump of the global economy will further damage the financial health of many vulnerable families, especially those whose savings and assets are depleted, or who have incurred new consumer debts. But negative experiences can have a powerful, and sometimes positive, effect on future behavior. Following the shocks they’ve experienced, more than half of our clients say they intend to save more money in the future. Self-employed people, whose earnings are more volatile, are especially motivated to save as a buffer against income shocks. Children are also a driving factor -- among the self-employed, 76 percent of those with three or more children express a stronger intention to save. Finally, the intention to save is enhanced by the ability to save, meaning plans to increase savings are more common among people much less likely to be poor (less than a 10 percent poverty probability).
The Global Findex 2021 survey reports that account ownership around the world increased by 50 percent during the past ten years, from 51 percent to 76 percent. But about two-thirds of unbanked adults said they could not use their newly opened accounts without help, a percentage that will only increase as financial services become more digitized.
Making Saving Affordable and Desirable
Low-income households are the most susceptible to under-saving, in part due to information and knowledge gaps. The Findex data confirms that, especially now, when financial services are predominantly digital, financially inexperienced users may not be able to benefit from account ownership if they do not understand how to secure its benefits and avoid consumer protection risks.
FINCA’s research team is currently exploring ways to make savings products easier to access, use and afford. We recently published a study showing that remote coaching through phone and text messages was effective at stimulating more active account usage, including the use of non-bank channels, which increased by as much as 264 percent. Coaching also increased the number of transactions, especially among women, who increased the number of deposits by 89 percent and total transactions by 85 percent.
Future economic shocks—driven by climate change, among other factors—will have a disproportionate impact on low-income households. Strengthening their savings habits, rebuilding their emergency funds and helping them utilize digital financial solutions now will help to prepare them for the challenges ahead.