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Building financial resilience in our households will aid economic recovery

Abel Munda and Godfrey Kioi

As the nation re-imagines strategic responses to swiftly deal with the current Covid-19 pandemic, it will find out that its solutions are inextricably linked to the financial resilience of Kenyan households.

Financial resilience is the capacity to cope with negative income or expenditure shocks, or to recover quickly from periods of financial adversity.

Financial resilience for households matters in salvaging a country’s macroeconomic stability in the wake of financial crises – particularly because household buffers play a role in consumption expenditure cuts and their response to debts.

At the moment, owing to the Covid-19 preventive measures, the financial muscle of most households has been handicapped, and the consumption spending power and debt response  impacted negatively.

For a country whose economy is driven by 83 percent of informal sector workers, and an average monthly household consumption per capita of around Ksh.5,000, according to the 2016 Kenya Integrated Household Budget Survey (KIHBS) Report, it is safe to assume that, how long these households stretch their resilience goes beyond just how long and widespread the health crisis spreads. Further, it might be dependent on how well-kitted most households were in terms of: savings, access to affordable credit; levels of debt or requisite financial skills to manage household consumption.

With Kenyans’ robust coping strategies already under strain, most households, on the throes of desperation, need to reconsider and unlearn what they know and need to know about financial resilience during a crisis. From an economics lens, the immediate, near-term and long-term aftershocks of the crisis to the economy and households, are here to stay.

Granted, there is no surefire strategy to come out of a financial crisis like this unscathed. Policy makers and financial experts, need to be at the forefront of strategic interventions that can help most households navigate this phase to a safe recovery. Case in point, Heritage and Liberty Insurance  has accelerated and expanded its existing free-to-public financial education program, to exclusively focus on guiding Kenyans to navigate through the pandemic’s debilitating financial impact.

However, at the bare minimum, households need to re-evaluate their financial sustainability. Are they financially fit to sustainably weather this into an unknown sphere? Are their budgeting, income and debt management, risk and investment appetite, and insurance behaviors consistent with the times?

A fundamental household change during this pandemic course is learning to cut on unnecessary spending and budgeting. In that complex journey, the difficult but necessary part, will be separating the wheat from the chaff – identifying the must-haves; non-discretionary things you have to pay for (food, house utilities, rent or mortgage) versus the discretionary spending you could get by without (eating out, entertainment, retail therapy). Here, a tight household budget regime, helps determine the cash coming versus expenses going and cementing what your short and long-term priorities look like. Frugality at this stage trumps extravagance. Anything to support resilience – disposing of a second car, no new clothes, foregoing a holiday.

Equally shrewd during this period is the ability to manage debt. There have been massive lay-offs and pay cuts, which has caused an unprecedented income shock for those in employment; businesses are going through distress and bankruptcies and it may be considered forgivable to carry debt for a while. However, debt is debt and nothing will hurt more than debt, especially high-interest debt (read credit cards and loans). It would be prudent for individuals to seek professional advice from the onset on managing debt. At this time, if in debt, engaging in a mutually beneficial dialogue with creditors goes a long way in situating solutions. To their credit, many lenders have provided this window during the pandemic.

This crisis might be a good time to take a hard look at ways to improve your financial standing, and all the factors that are threats and weaknesses to your income generation. It could mean a change of job; business location, improving skills and broadening knowledge on a particular subject, changing trends, starting a side hustle, monetizing your expertise in multiple ways and diversifying your income.

Certainly, there might not be going back to normal as we knew it after this crisis. The very definition of normal is likely to change. Ensuring financial responsibility at the household level is at the heart of what is the new normal.

The authors are the Managing Directors of Liberty Life Assurance and Heritage Insurance Kenya and Patrons of Mind My Money, a financial literacy initiative of the Liberty Group.