Sebstad and Cohen identified three main pathways through which microfinance services can reduce vulnerability: income-smoothing, building assets (including financial, physical, human and social assets) and empowering women. In my last post (# 39), I reflected on the ambivalent attitude of the microfinance movement toward savings (financial assets) due to a history of divergent interests of clients and providers. That ambivalence is giving way to energetic efforts of providers to cater to clients’ need for safety and accessibility of their savings and desire to mentally earmark portions of their savings for different purposes with different time frames and challenges.
As Ignacio Mas articulates so well, there is still a long way to go before the providers are likely to meet the savings product design challenge. He writes: “We need to construct a much more nuanced savings service that incorporates all the mental discipline features that people already use, but is not so complex to operate that people give up on it.” Further, there is the challenge of “building a continuous relationship between a poor client and the bank, one that is based on capturing the client’s personal goals, habits and mental processes rather than on promoting a prescribed list of bank products.” Wouldn’t it be great if my credit union offered me this kind of relationship? Don’t get me wrong; I like what I get from my credit union. I’m just suggesting this “relationship” is a tall order for a provider of services to the poor or to anyone.
Ignacio Mas suggests that mobile-phone technology can enable this “relationship.” Yet, listening yesterday to a private and frank exchange among people who know about the promise and challenges of massive-scale, phone-enabled banking, I learned that so far there are lots of experts doing consultancies and speaking at conferences while we’re all waiting for another Safaricom moment to really demonstrate the potential beyond Kenya. I bet Mas would agree. There is still a long way to go.
Given the history of microfinance ambivalence toward savings in general and given the long road ahead to meet the design challenge and given the fact that evidence reflects past experience and does not predict future performance, let’s look into the evidence that microfinance helps build household savings.
How many poor households have savings on deposit at a formal financial institution, including microfinance providers?
The report of the Global Financial Inclusion Database (Global Findex) states on page 30: “Worldwide, about a fourth of adults report having saved at a bank, credit union, or microfinance institution in the past 12 months—though the share ranges from 45 percent of adults in high-income economies to less than 7 percent in Europe and Central Asia and the Middle East and North Africa.”
The Findex report does not disaggregate data for banks and credit unions from data from microfinance institutions. My colleague Lynne Jarrell is talking with the Findex staff to get access to disaggregated data, but for now, let’s estimate. Narrowing the population of developing economies to the poorest two quintiles (the bottom 40 percent), who are unlikely to do business with banks or even credit unions, I estimate from the Findex report’s figure 2.2 that about 8 percent of Q1 (the poorest quintile) and 13 percent of Q2 (the next poorest) saved in the past year (from the time of the study) with formal microfinance services for the poor.
Again, worldwide for all economic levels, current savers constitute only 43 percent of all formal account holders. As Beth Rhyne has observed with understandable frustration, knowing only that a person has an account with a formal financial institution doesn’t tell us how much they use it, if at all. It is probable that many of these accounts don’t invite or even allow savings deposits. The Findex report states on page 33:
Many adults, despite having a formal account, save solely using other methods. These people, who might be classified as “underbanked,” make up 12 percent of account holders worldwide and more than 30 percent in several economies, including Mali and Mexico. Those choosing to use an informal savings method rather than their formal account may do so because the costs of actively using their account are prohibitive—as a result of such barriers as balance and withdrawal fees and physical distance. It is also possible that wage accounts set up by employers cannot easily be used to save.
“Other methods” of saving range from the proverbial “under the mattress” (but most of the poor don’t have mattresses; they roll up their bedding during the day because their daily indoor lives take place in that same space) to the “coffee can” buried in the ground that I described in Mali, to asking friends or paid money guards to hold the savings, to buying assets like jewelry and livestock, to joining savings groups.
Freedom from Hunger’s notion of “microfinance” includes semi-formal, community-based savings methods that are structured and disciplined by social convention, such as ASCAs, ROSCAs, Self-Help Groups in India and savings groups in Africa. If we count these semi-formal groups, the percentage of people saving with microfinance providers goes up, dramatically in some regions of the world. According to Global Findex (p. 34 of the report), 19 percent of sampled adults in Sub-Saharan Africa report having saved in the past year using a savings club or person outside the family. Among just those who report any savings activity in the past 12 months, 48 percent use community-based savings methods. However, use of community-based savings methods is less common elsewhere among the developing countries (10–20 percent of savers in contrast to 48 percent in Sub-Saharan Africa). Of course, people can and do save with both formal providers and community-based methods—5 percent of adults in Sub-Saharan Africa use both at the same time.
We have to be careful when we ask whether or not microfinance participation helps poor households build their savings. The fact that clients have savings on deposit with the microfinance provider, or not, is as much due to the provider’s legal structure (license to take savings deposits), policies (regarding encouragement of savings) and products (safety and accessibility features) as it is due to the ability and desire of the client to save money. Moreover, the very common practice of using a variety of savings mechanisms (formal, semi-formal and informal) means that the amount on deposit is only a portion of the client’s total savings. The amount on deposit may be mandated as a prerequisite (collateral) for taking loans, such that clients reluctantly substitute one kind of saving for another without actually increasing their total savings. In short, we have to ask the client how much she or her household holds in total savings in whatever variety of mechanisms she and other household members use. Accurate answers are quite hard to get. Nonetheless, in the next post, let’s look at the answers some researchers have gotten.