Can Cash Compete with a Pig?

Posted by olga_moraw on Apr 26, 2012

Editor's Note: This is the second blog in a three-part series co-authored by Ali Ndiwalana, Lisa Kienzle and Ignacio Mas on mobile money. Post #1 can be found here.

What are the rewards or incentives and mechanisms that are needed to help poor customers set aside money to meet their financial goals? Banks in Uganda are taking numerous measures to capture the market – from offering unusually high interest rates (Crane Bank is advertising 20% on fixed-deposit accounts) to introducing lottery schemes that offer houses and cars for new savings account customers (e.g., Vimba with Bank of Africa or Fuuka binojjo with Housing Finance Bank).

But even this fierce competition and significant incentives, the majority of Ugandans still prefer stuffing cash under their mattress or converting their cash into in-kind assets such as chicken, pigs, goats and cows. Lack of access to formal financial tools is just one reason for this preference. There is something fundamentally important that the banks have not considered when cultivating their incentive schemes: The rewards offered by these assets are hard to beat.

Take the example of the pig, which produces three cycles of eight piglets, or 24 piglets, per year. A grown pig can be sold for 200,000 UGX ($80), which amounts to a return of 4.8 million UGX, or a bit more than $2000, per year minus the cost of their upkeep. Not bad for some swine! These in-kind investments also regularly produce other goods that can be consumed or sold – for example, chickens produce eggs, and cows and goats produce milk.

Within the context of such returns, cash can never really be king in poor communities because it does not quickly multiply or consistently produce anything of palpable value. What you see is what is printed on the note. It is only what you can buy with it in the market that changes. And with food inflation as high as 42%, cash is quickly losing its value. So why would anyone in their right mind keep their value in cash in the context of such high returns? More importantly, how can we design appropriate financial products in communities where it pays off to be “cash lite”?

Grameen Foundation’s AppLab Money team, together with its advisor Ignacio Mas, went out to the field to answer such questions while testing deferred – or “Me2Me” – payments. The concept works on the assumption that people find value in setting savings goals and that they regularly put cash away to meet those goals (see the first post for a summary on how this would work). But we quickly learned that our informants capped the amount of the money that they held in cash, usually at 50,000-100,000 UGX (about $20-$40). They did this not only to curb their own temptation to spend it but also because in-kind assets offer much larger returns.

The team further tested several different types of reward features – varying by type, timing, certainty and beneficiary. Reward types were either cash or in-kind (e.g., airtime, sugar, etc.); most people preferred cash. When asked about timing, most preferred immediate rewards – that is, they preferred a small reward after each deposit rather than a large one at the end when the goal was met. They liked the certainty of a guaranteed reward, even if small (e.g., 2,000 UGX, about $1), compared to the likelihood of winning a bigger but uncertain reward, such as through a lottery. They also wanted rewards to be personal as opposed to contributing toward a communal or group goal (e.g., building a school). They expressed that savings was a personal endeavor and rewards should be no different.

Although our informants preferred their rewards in cash, they stored their savings in-kind, even though much of the literature tells us that such in-kind assets are risky – if animals get sick and die, wealth is gone. The reason? If you put all your savings in only one type of animal, then that is indeed risky. But most of our interviewees noted that they diversified their assets to minimize such risks. They kept chickens, cows, pigs, goats, and a little bit of cash.  When they needed more cash, they would liquidate an asset.

We did discover one small problem with the liquidation process. Most large expenses are recurrent and have to be paid by everyone in the community at the same time – school fees are a good example. About a week before these fees are due, everyone starts to offload their assets to get cash. With much more supply in the market than usual, the price of these assets can fall significantly. 


There are two options to circumvent this asset deflation. The first is to sell the asset earlier, which few want to do because they fear that they will spend the cash. The second is to lock cash away until the payment is due, which is where deferred or Me2Me payments could potentially be interesting. We could never compete with the rewards offered by in-kind assets, and we shouldn’t have to. But we could help the poor mitigate the risk of asset deflation by enabling them to keep just a little more cash on hand – at least enough to meet the next school-fees payment. While everyone else is scrambling to sell their assets, Me2Me customers can have the cash sent back to them and use the “pay school fees” mobile-money function to transfer cash directly to the school.


This makes sense to us, but there is one more thing that we need to explore – will customers agree?  If we offer them such a product, and ask them to use it to save, will they think more about the opportunity cost (“I could have bought two chickens that produce 20 eggs”) than the potential value they could lose on the asset when they sell while everyone else is? Most important, how do we design appropriate financial products in a context where cash is not always king? We will will look at liquidity options that encourage customers to save to meet financial goals in our third and last post! 


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