Savings Practices @ the BOP
By Irvin Sha
As part of our course on Financial Innovation, our team worked in conjunction with Mercy Corps and Micra to look at what microfinance institutions (MFIs) around the world have been doing to stimulate savings amongst the poor. Practically speaking, savings and loans are opposite sides of the same financial coin. Both provide the poor with large lump-sums of money that they can put to work for special occasions, such as capital investments in businesses, weddings, education, etc. Both require a series of semi-regular payments into a loan/savings pool. The key difference from the consumer’s perspective is when they can expect that lump-sum to be available to them. For loans, the sum is available prior to the payment stream, whereas for savings, it is only available at the end.
Most MFIs have concentrated on the loan side for a number of reasons. First and foremost, most have taken the view that the poor simply do not make enough to save. Secondly, most of the innovations to date – e.g. Grameen style joint liability programs – have been around loan repayment. Lastly, and perhaps least frequently mentioned, is that loan programs have so far tended to be far more profitable than savings. As a consequence of this, micro-savings programs for the poor have been largely left as ancillary products attached to MFI loan programs.
But none of this means that the poor do not want to save, as illustrated by the following quotes taken from a MicroSave study in East Africa:
- If I had some kind of insurance or pension plan I could be saving for my old age. As it is, I give money to my brother in the village to buy goats and cows. Whether he’ll look after them for me, and whether he’ll pay me in the end, only God knows.
- You ask us ‘what do we do when we are too old to work? I’ll tell you what the answer is – we pray to die.
- When my mother was still alive I used to give her a few shillings every day, kept back from the housekeeping money. She looked after it for me really well, and every January there was always enough for the school fees. Now she’s dead I just haven’t got anyone I can trust like that. It’s much harder to make sure I’ve enough for the fees. We may not be able to send our youngest to school this year.
Lacking institutional savings mechanisms, the poor have typically relied on informal savings mechanisms, such as hiding their money, buying livestock, or giving their money to friends and family for safekeeping. These mechanisms are typically fraught with risk. In one account, a man who had been hiding his money under his mattress for years woke to find that much of his savings had been consumed by rats. Such accounts are more the norm than the rarity, and typically lead to losses of ~20% on average. In the face of this, many of the poor have demonstrated a willingness to sign up for savings accounts with essentially negative APRs, for lack of a savings mechanism of comparable security.
In some ways, the holy grail of micro-savings products is a product that effectively replicates the convenience of Western savings accounts, but at a sustainable cost. This is more difficult than it sounds; whereas a loan officer can be reasonably confident that he won’t have to visit his clients except on repayment days, the needs and timing of a savings client are significantly more volatile. To mitigate this, micro-savings programs generally impose some combination of restrictions on their programs. These include:
- Deposit size – The MFI may require a fixed or minimum deposit size in order to ensure that it can recoup its processing costs
- Deposit frequency – MFIs may restrict deposits to a daily, weekly, or even less regular basis
- Withdrawal restrictions – Many savings products only permit periodic withdrawals, or may lock the savings up until the occurrence of certain events (e.g. reaching a certain amount in savings, repayment of an MFI loan, or a pre-defined event such as a marriage)
- Loan bundling – MFIs may only offer savings as part of a packaged deal with one of its loans; in these cases, savings are typically held as collateral against the loan
- Joint liability – Typically seen in loan-bundling situations, the savings account may be part of a joint liability program, in which the default of one member of a group may lead to the loss of the other members’ savings
Depending on how these restrictions are structured, they may or may not raise the cost of saving to the point where a savings relationship with the MFI may become unpalatable to the poor.
That being said, strides have been made in the last decade to overcome these problems. As with loans, some of the most interesting work in the area has been done in Bangladesh. SafeSave, co-founded in 1996 by savings pioneer Stuart Rutherford, has done a great amount to alleviate some of these difficulties in the slums of Dhaka. SafeSave’s core program eliminates most deposit, withdrawal, and joint liability restrictions, and yet still manages to be profitable. Moreover, through a series of pilot programs in the rural Hrishipara region, SafeSave has continued to examine alternative ways of offering economically sustainable savings programs to the poor.
In addition, many savings programs have tried various innovations to make their programs more attractive and more affordable. Incentives have included lotteries, member discounts, and even stickers for little children. In the Dominican Republic, a soap opera with savings as its central theme was funded in order to firmly implant a savings mentality into the popular culture. Perhaps the most exciting advances have been made in the mobile savings space, with M-Pesa and its 8.5M customers leading the way.
Although perhaps less inherently sexy than the typical MFI loan program, savings products are still in very strong demand amongst the poor. Economically sustainable means of satisfying this demand exists. Whether or not they gain traction is an open question.
