Accumulating Financial Assets: Microfinance Ambivalence about Savings and the Poor

> Posted by Chris Dunford, Senior Research Fellow, Freedom from Hunger

The following post was originally published on Chris Dunford’s blog, The Evidence Project. 

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 were 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.

To read the rest of this post, visit the The Evidence Project.

Image credit: Bill & Melinda Gates Foundation

Have you read? 

“Can we make savings a little bit more interesting for people, please?”

Delicious Hope: A Loan for Doughnuts through a Village Savings and Loan Association

Understanding Savings Behavior: A Comment on “The Financial Behavior of Rural Residents”