How Bangladesh Democratized Its Savings Culture

Bangladesh may be best known within financial inclusion circles as the birthplace of modern microcredit. But it has also democratized savings by developing formal savings instruments that are used today by many of the country’s poorest households. 

Pre-eminent among them is a long-term “commitment” saving plan offered by banks, insurance companies and microfinance institutions (MFIs). Savers commit to regular equal monthly deposits for up to 10 years and earn good interest. Savings can be withdrawn before maturity if needs be, and in most cases savers may use their deposits as security against loans.

A recent paper by the Poverty Action Lab looks at evaluations of commitment savings plans around the world and finds strong demand for them, well justified by how they help low- and middle-income savers accumulate funds for a wide range of uses. This is eminently the case in Bangladesh.

A shared achievement

Several actors helped Bangladesh become a leading example of democratized savings.

In 1983, not long after the birth of Bangladesh, the government developed a commitment savings plan known as Deposit Pension Savings (DPS), to build capital for its state-owned Sonali Bank. It quickly became popular with the banked public — in those days, mainly middle- and upper income-customers — so much so that before long the bank sought to dampen demand. But it has remained hugely popular.

In the 1990s pioneering NGOs experimented to see if the much poorer households that they served would like the idea. I came across one such NGO, SDS, and mentioned their work to BURO, a fast-growing MFI. In 1996, BURO launched its own version of the product with considerable success among its low-income customers.

From 2000 Grameen Bank, Bangladesh’s premier MFI, launched a version called Grameen Pension Savings, or GPS, and offered it to its millions of borrowing clients. It was part of its relaunch as “Grameen II” after growing over-indebtedness among its microcredit clients had damaged its loan portfolio and Grameen was seeking fresh ways to raise capital. It was spectacularly successful. Soon most other MFIs took it up.

But the people of Bangladesh, rich and poor, were the decisive actors. They quickly saw that these accounts suited their needs and opened them in their millions. We can learn what they did with them, and hear their voices, in successive financial diaries done in Bangladesh between 1999 and today.

Telling the story through diaries

The first financial diaries, done in Bangladesh from 1999 to 2000, looked at how poor and very-poor households, urban and rural, managed their money. There were no reports of the DPS in those diaries because banks did not at that time serve the poor. But the study revealed the many ways in which poor people built and held reserves of money, hiding it in the house, giving it to trusted relatives or neighbors to look after, or forming savings clubs. It demonstrated that low-income households had an appetite for saving as well as for borrowing.

Rahima, one of the Microsave (MSC) diarists, holds her GPS passbook in 2004.
Rahima, one of the Microsave (MSC) diarists, holds her GPS passbook in 2004. “Grameen should have started GPS years ago,” she said. Photo: Stuart Rutherford

Diaries commissioned by Microsave (now MSC) between 2002 and 2005 examined the early progress of Grameen II. Many diarists like Rahima (pictured here) explained how the chance to build large sums through small deposits was as useful, or more useful, than Grameen’s loans. Poor households know they will face large expenditures, like the marriages of their daughters, treating illnesses or sending people to work overseas. Grameen’s forum for interacting with their clients — the weekly meeting in the village — provided the ideal chance to build such sums.

Women like Rahima quickly turned Grameen into a savings bank. Largely thanks to the GPS, by 2006 Grameen’s deposit portfolio was worth 150% of its loans outstanding. In April 2021, Grameen reports that it is holding just under $2 billion of microfinance client deposits — and Grameen is just one of many MFIs offering such services.

The 60 poor and very-poor diarists in the ongoing Hrishipara Diaries bring our story up to date. Poor though they are (a quarter of them are “extremely poor,” using World Bank measures), their combined savings in late 2020, mostly in MFIs but some in banks or insurance companies, was twice as large as their combined loans from these sources. Twenty-five out of the 60 households held DPS or GPS accounts, worth between them 950,000 taka (about $11,300), and another nine had held accounts that matured recently.

Shalini and her youngest daughter are pictured here in 2015.
Shalini and her youngest daughter are pictured here in 2015. Shalini is currently saving in a DPS for her daughter’s wedding. Photo: Hrishipara Diaries

Shalini, a widow living with her youngest daughter, breaks bricks by hand for use on building sites and earns on average 264 taka ($3.10) a day. Yet she saves 500 taka a month in a DPS at the MFI ASA. She started the plan eight years ago, hoping it will pay for the marriage of the last of her five daughters. To save at this rate she takes no loans, so as not to be diverted by loan repayments — though should an emergency occur, she can borrow from ASA against her DPS balance, which now stands at 55,500 taka, about $650.

The DPS gives people like Shalini hope that they can achieve their goals and gives them security in times of trouble. It gives them a buffer against any difficulties they may face repaying MFI loans, since they can set off their savings against debt. This in turn protects the MFIs, and the existence of this “double buffer” is an important reason why Bangladesh, unlike some other countries, has never faced a major MFI loan crisis.

The DPS has made MFIs the main guardians of poor people’s savings in Bangladesh, savings which are steadily growing and financing more and more spending. It is a little-known but major contributor to Bangladesh’s progress.

Stuart Rutherford, a researcher interested in the question of how low-income households manage their money, is the originator of the financial diaries research methodology. All fieldwork for the Hrishipara Daily Diaries Project is now being funded by L-IFT. Their invaluable support is gratefully acknowledged. 

Stay tuned for the next post in CGAP's "Bangladesh at 50: Reflections on Financial Inclusion" blog series.


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