Of the three main pathways through which microfinance services can reduce vulnerability (income-smoothing, building assets (including financial, physical, human and social assets), and empowering women), the last two posts covered the evidence for income-smoothing and accumulation of physical assets. Now I turn to financial asset accumulation, which for the poor basically means savings. Before getting into the evidence that microfinance helps build household savings, I want to reflect on the ambivalent attitude of the anti-poverty movement toward savings.
By common definition, the poor have no money, and they live “hand to mouth,” so how can we expect them to save?
If past literature and practitioner experience was not enough, recent books, especially Portfolios of the Poor and Poor Economics, have dispelled the old notion that the poor can’t save. We know they can and they do. We know there are long-standing traditions all over the world that encourage and offer guidance to both poor and not-so-poor people on why and how to save money for future use. When people don’t save, it is often because they doubt the security and accessibility of their money. Often they don’t have access to options for protecting their money from diversion to family and friends and from their own lack of self-discipline to overcome the temptation of “now” in favor of “later.”
One widely available traditional option is to borrow money to buy a physical asset, such as livestock or jewelry, which serves as a store of value that is hard to fritter away without making a momentous decision to sell. As Stuart Rutherford famously observed, borrowing and saving are very similar when each involves regular, small outlays of money; whether repaying a loan or depositing savings, the setting aside of the money feels the same. The difference is that saving yields a “usefully large lump sum” at the end of a series of payments, while borrowing yields that sum at the start of a series of payments. Borrowing from a moneylender (who demands repayment or else) imposes a stronger discipline than one’s personal resolve to stash away a little money each week. Therefore, in the absence of other options, borrowing may be the preferred form of saving!
Another traditional option has long been available to those who are willing to come together in self-help groups (in the generic sense, not referring to Indian SHGs per se) to impose a saving discipline upon themselves and their fellow group members. Various forms of savings groups are common worldwide, especially in more traditional cultures without easy access to formal financial services. Often, use of and loyalty to savings groups persists even when formal financial services enter the scene and are used in addition to savings groups, each serving a different function in the financial lives of the group members.
The savings cooperative movement starting in the 19th century built on this willingness to cooperate for the good of all members sharing the bond of community or other mutual interest. Mutual ownership of savings-led institutions became a viable alternative to traditional for-profit commercial banking. Seeing the success of deposit-taking institutions in raising capital for lending and feeling the pinch of dependence on donors, lenders and investors, microfinance institutions in many markets are enduring the pain of government regulation and complex liquidity management in exchange for the privilege of taking public savings deposits to finance their loan portfolios.
Yet the microfinance movement started as the microcredit movement and remains mostly committed to microcredit to this day. Why?
In part it was because of the old notion that the poor don’t have money to save. To overcome this poverty trap, it has been presumed, they need an injection of outside capital to jump-start their progress out of poverty. This would work only if they invested this outside capital in a profitable microenterprise. Thus arose the “classic microfinance theory of change” examined in excruciating detail in Theme Three. However, as it became increasingly clear to practitioners who were paying attention, credit by itself is not leading to business formation and progress out of poverty on a massive scale. The dominant narrative turned to the simplistic idea that the poor need savings, not credit.
The sophisticated counter-argument was well articulated by my former Freedom from Hunger colleague Didier Thys. The problem with consigning the poor to saving rather than borrowing is that only an infusion of outside capital can expand the “production possibilities frontier” of their economic lives. This is a more sophisticated and persuasive version of the old notion that the poor don’t have money; it also correctly justified practitioner resistance to giving up on lending to the poor, even the very poor.
There was another and even more compelling reason to stay focused on microcredit. It is a whole lot easier to make money by lending rather than taking savings deposits. Desire for early break-even and profitability plays a huge role in maintaining the emphasis on microcredit as the starting offer to the poor.
There are more subtle anti-savings consequences of the effort to maintain profitability. For example, the original village banking model promoted by John Hatch emphasized the importance of saving about 20% of the value of each loan so that the group could build its own equity for lending to each other and eventually have enough so that they would no longer need access to external credit. In essence, this was a traditional savings group model (the accumulating savings and credit association—ASCA) amped-up by infusion of external capital in the form of credit for microenterprise start-up, expansion and diversification, culminating in independence from external sources of credit. Meanwhile, the members could borrow from the accumulating savings they jointly held to deal with emergencies and other needs.
This original version of village banking was very popular with the poor and the not-so-poor for perhaps obvious reasons. But this design worked against the sustainability of microfinance providers of the village banking model. They do not want their best village banks to graduate from dependence on external credit; these are the cash cows of their business model. Moreover, the providers perceived the borrowing from the “internal account” (as John Hatch called it) as an unmanageable risk to repayment of the external loan from the provider (yet CRECER in Bolivia and FINCA Peru, among others, still accommodate the internal account and make a profit all the same). While the impetus of the microcredit movement was to lend to those who could not provide physical or financial collateral (character-based rather than collateral-based lending), the village banking providers found it in their self-interest to lock up the savings of the group as collateral (forced savings) that could not be accessed until the external loan was repaid. In effect, the internal account and internal lending were abolished, and the members lost two highly desirable features: access to their own savings deposits during the “loan cycle” and access to opportunities to borrow from the total pot of member savings (as in a savings cooperative). The AS in ASCA was shut down and the C became more or less the whole show.
Variations on this evolution of village banking played themselves out in other microcredit models, favoring the providers’ sustainability at the expense of resilience-enhancing benefits to the clients. So it is ironic that the microfinance movement now wants so much to bring savings back into the menu of services. It just has to do so in ways that enhance rather than depress provider profitability.
Much can be learned by microfinance providers from the structure and operations within traditional ASCAs, especially as they have been upgraded by the still-new savings group movement (mostly in Africa) to be more systematically propagated and reliably operated. The learning to date has been captured well in the forthcoming book, Savings Groups at the Frontier, that has emerged from the Arusha Savings Group Summit (October 4–6, 2011 in Arusha, Tanzania), expected to be published this month and showcased at the SEEP Annual Conference (November 4-8, 2012). Yet the microfinance community does not embrace the savings group movement as one of its own, because these modern savings groups are typically propagated by non-market-driven, charity-dependent organizations like CARE, Pact, Catholic Relief Services, Oxfam America and Freedom from Hunger and their local NGO partners.
Learning from market-driven, deposit-taking institutions was captured very well in the 2005 book edited so ably by Madie Hirschland, Savings Services for the Poor (see also Chuck Waterfield’s excellent review of the book).
So you see how ambivalent microfinance has been about savings for the poor. Microfinance is just beginning to get past that ambivalence and get serious about offering savings opportunities truly designed to meet the needs and constraints of the poor, even the very poor.