Liquidity Management Planning Techniques and Approaches to ensure service continuity Ciprian Panturu Associate Consultant PHB Development Developing and managing efficient Agent Networks in Lao

Overview Definitions (MPESA liquidity) What does « Liquidity » mean for DFS? What does « Liquidity » mean for Agent? Techniques and considerations to ensure liquidity Liquidity Rebalancing Transactional patterns Planning ahead (holiday/ busy days/ bank closed) Support received from the Service Provider Alerts on Liquidity levels Regular visits from the Agent Supervisor Super Agents structure

What does « Liquidity » mean for DFS? DFS does not create value at any point in time, the digital value is backed up by physical cash at 1 on 1 ratio As long as both cash and e-value co-exist, there is need to exchange one against the other The « exchange » between e-value and cash takes place at the Agent (for this channel) A

What does « Liquidity » mean for DFS? Why does the Agent need Funds on account? Cash – E-value + E-value – Cash + Customer Cash in/ Initiate OTC Agent

What does « Liquidity » mean for DFS? Why does the Agent need Funds on account? Customer Cash in/ Initiate OTC Agent Low Balance

What does « Liquidity » mean for DFS? Why does the Agent need Cash in hand? Cash + E-value – E-value + Cash – Customer Cash out/ Receive OTC Agent

What does « Liquidity » mean for DFS? Why does the Agent need Cash in hand? Customer Cash out/ Receive OTC Agent Low Cash

What does « Liquidity » mean for Agent? The Agent needs to have, AT ANY TIME, both Cash in hand AND Funds on account, in SUFFICIENT AMOUNT to serve any customer comes to transact Agent Customer A Cash in/ Initiate OTC Customer B Cash out/ Receive OTC

What does « Liquidity » mean for Agent? 100 Million LAK Cash Million LAK on Account Problem solved! … but the Agent transacts twice a day & gets 600,000 LAK/ month as commission He has better things to do with that money! Buy more goods and sell them in the shop Expand business, invest in new equipment Buy a new car, organize a wedding… The Agent will invest if the return meets the expectations

Liquidity Rebalancing Let’s assume the average transaction at 300,000 LAK and the Agent makes 2 transactions per day: He goes every day nearby a rebalancing point and he makes sure he balances his funds every time He needs to invest 600,000 LAK in cash and 600,000 LAK on account = 1,200,000 LAK investment …and he gets 600,000 LAK as commission per month By rebalancing the funds, the Agent is not increasing, nor decreasing the total investment Blue line: Agent’s account balance, Orange bars: rebalancing transactions (adding cash when low, subtracting it to deposit on the bank account)

Liquidity Rebalancing - exercise Agent starts the day with 5M in cash & 5M on account The following transactions take place: Customer TxnAgentCashA/C Bal.Total Start5M 10M Sends 1M OTCReceives cash 1M/ Pays 1M from a/c6M4M10M Makes 2M deposit Sends 2M OTC Receives 1M OTC Makes 2M deposit

Liquidity Rebalancing - exercise Agent starts the day with 5M in cash & 5M on account The following transactions take place: CustomerAgentCashA/C Bal.Total Start5M 10M Sends 1M OTCReceives cash 1M/ Pays 1M from a/c6M4M10M Makes 2M depositReceives cash 2M/ Pays 2M from a/c8M2M10M Sends 2M OTCReceives cash 2M/ Pays 2M from a/c10M0M10M Receives 1M OTCPays cash 1M/ Receives 1M on a/c9M1M10M Makes 2M depositReceives cash 2M/ Pays 2M from a/c??

Transactional patterns From City to Village Cities are net senders  Agents need more e-value Villages are net receivers  Agents need more cash Seasonality Sending during harvest period Receiving during rainy season Early morning/ late evening Each Agent has an unique transactional pattern They need to understand it and plan liquidity accordingly By looking back at previous week/ month’s transactions… …they can identify high and low transactional behaviors

Planning ahead For recurrent events Market days: people will take advantage of this trip to perform their transactions Week-ends: banks are closed – plan for liquidity ahead, people have time For holidays/ other events Lao New Year/ Women’s day Around start date of School or University year 1.5 X stock rule Start each day with 1.5x « previous day’s transactions » DateTotal Cash inTotal Cash out1.5X Rule Cash in1.5 Rule Cash out 28/012,000,0005,000,0003,000,0007,500,000 29/011,000,0002,000,0001,500,0003,000,000

Alerts on liquidity levels The Agents have their own business to run. Sometimes, they may forget to check their Balance/ level of cash. An Alert SMS can help to remind them about it. If Balance is low Send SMS Alert and propose corrective actions Agent Supervisor calls the Agent and proposes to rebalance If Balance is high It could mean that the Agent is low on cash Same actions as above, but less categoric Low Balance Alert Your Balance is below the specified limit. Please rebalance! Nearest cash point: Low Balance Alert Your Balance is below the specified limit. Please rebalance! Nearest cash point:

Regular visits from Agent Supervisors The Agent Supervisor has to be in permanent contact with the Agent: Visit each Agent at least twice a week Review Agent’s past transactions and identify any liquidity issues that occurred Engage a positive dialogue The A-Supervisor will offer training and support on all matters, but especially on how to manage the liquidity: Present the different techniques to manage liquidity Provide proximity contacts for rebalancing Provide support to define each Agent’s liquidity profile and transactional patterns

Super Agents At the beginning, Service Provider’s Points of Presence have the role to assure rebalancing points for Agents For more evolved deployments, partnerships with Financial Institutions are put in place to assure liquidity Super Agent Structure: Leverage on their Points of Presence for Agent rebalancing Master Agent structure: Financial Institutions select a group of Agents and manage their liquidity High-volume cash handling businesses Similar arrangements with Corporations disposing of wide and mobile distribution networks, handling important amounts of cash – i.e. Beerlao

Conclusions Liquidity Management represents certainly a challenge for DFS developments: It is crucial to understand the mechanisms to mitigate this risk It is important to promote a culture of compliance to liquidity rules among the Agents from early stage Monitoring customer’s and agent’s transactional behaviors provide insights to adjust the liquidity policy Source: Sicap 2012, Coping with Dormancy

Ciprian PANTURU Associate Consultant PHB Development Thank you!