In 1946 or thereabouts my father took me to the local bank and helped me to open an account. He made something of a small ceremony of it, and he added ten shillings (around two U.S. dollars in those days) to my ten shillings of savings to make it up to one pound.
I do not remember much of the occasion, I was very young at the time, but I certainly do NOT remember that there was any talk of credit or a loan. The bank was a place to save, they would take good care of my money, and might even add a little to it, and perhaps I could (with my father’s permission of course) take some of the money out one day, but even that was not mentioned.
So my own and maybe most readers’ first view of a financial institution was that it was a place to save. Borrowing might come later, but much later, and the purpose of saving was not to qualify for borrowing; it was a useful thing to do for its own sake.
Why should it be any different for ‘the poor’?
Much of the world is in trouble today because of debt, too much borrowing, presumably not enough saving, by individuals, companies, countries and groups of countries. Microfinance is still mainly microcredit, that is, as David Hulme told us sixteen years ago, ‘microdebt’. Microfinance institutions have successfully, and with some recent exceptions quite profitably, extended the same facilities for indebtedness to millions of poorer people.
Now, as if it was some remarkable new discovery, we are wondering whether these institutions should also offer savings facilities. The analogy is imperfect, but is this not a little similar to a teacher wondering after some years of teaching writing, whether she might also teach her pupils to read?
Or perhaps we are in the same position as I was many years ago when I was travelling in the Republic of Ireland and I had lost my way; I stopped to ask an elderly gentleman which was the right way to Galway. He paused, and then replied ‘Well, I am not sure that you should have started from here at all’.
Saving is surely not an optional extra which we may or not add to credit. It is where we should have started, not because it was more convenient or more profitable, or a cheaper way to raise funds, but because it was and still is the most important financial service, particularly for poorer people. The BRAC and Bandhan ‘Targetting the Ultra-poor’ (TUP) programs in Bangladesh and India are successfully reaching and helping very poor people to become less poor. They do this with a range of services, including savings, but credit is not part of the package.
Northern Rock, one of Britain’s major mortgage providers, discovered a few years ago that it was more profitable to focus on lending, on indebting its clients, than to bother with taking their savings as well. The transaction costs of borrowing large sums on the international money markets were far lower. Northern Rock’s dramatic collapse in 2007 demonstrated that this was not a viable long-term business model, but microfinance institutions which focus only on credit are surely making the same mistake.
They may claim that they are only prevented from taking client savings by their lack of a banking license, but there has at least until very recently been little movement away from debt and towards client savings as the major source of funds. The availability of relatively low cost wholesale funding from ‘social’ lenders makes savings mobilization even less attractive. There have of course been a few important exceptions such as the Grameen Bank in Bangladesh. And, of course, Bank Rakhyat Indonesia, which has always acted as a full-service bank and not a client indebting institution.
It is not easy to make this change, to get from the wrong starting place to the right destination, as my Irish informant said. It took KBSLAB, the licensed bank in the BASIX group in India, ten years to bring its savings portfolio to the same level as its loans, because there was four years’ earlier history of lending only.
Nevertheless, the transition must surely be made. It is unlikely that any of the readers of this note would chose as their main financial service provider an institution which only offered credit, and which only allowed them to remain as its clients if they remained permanently in debt to it, apart perhaps from a few weeks of so-called ‘resting’ between paying off one loan and taking another.
Why should we expect the poor to choose differently?
You are definitely right.. but in a region like MENA, regualtions have been a main obstacle. Even thouse countries who are currently working on new regulations for microfinance like (Egypt, Tunisia, Palestine, Iraq), they are limiting it to microcredit. So, pushing and lobbying for regulations which allow for microsavings should be from where to start i guess.
Before concluding that financial intermediation must always begin with savings, let us look at the functions that savings and credit serve for the poor. Savings involves keeping aside small amounts regularly to accumulate a surplus that is put to some use, say to purchase an asset. In the case of credit, the asset is purchased with borrowed money which is then paid back regularly in small amounts. In either case, both are financed by the household’s balance sheet and serve the purpose of smoothing short-term consumption. Microcredit here is not like project financing where repayments are made from revenues streams that the project would generate upon completion. It is serviced the same way as savings is. There is no difference between the two, except in the timing and the relative costs (interest expenditure, inflationary losses and opportunity costs which drive the urgency for credit). While it is imperative that the service provider must offer both savings and credit, among other services, let us not conclude that borrowing is necessarily a bad option or that having the ability to spend from own funds is always the better option.
Emphasising the importance of savings and that Microfinance should have started with savings and not with credit, is a battle that has been fought and lost. The MicroCredit Summit and its friends in academic places and in the “red carpet stars” from South Asian micro-credit NGOs convinced the UN to have a micro-credit year and all the Western charities jumped on it and put the term “micro-credit” after each activity that might benefit poor people, from water-holes to solar lamps and so on.
Furthermore, savings have always been a priority for governments as well as for their citizens. Where don’t we have postal banks, national savings programs and Savings & Credit Cooperatives? In India for instance postal banks and national savings programs started around 1895 and do still exist in a major way. In a speech of the central bank Deputy Governor, RBI stated in 2008 that about 81% of Indians have a Savings Account and only 25% a “Credit Account” (whatever that is!). Also CGAP in its country reviews often identifies that savings banks, postal banks etc. have many more savers and savings than borrowers and outstanding loans.
So where is the problem?
The problem is that the term “savings” is wrong for two reasons and should be defined as “deposits” in accounts of regulated financial institutions that ensure the safety of these deposits.
As is often said, the poor and especially the destitute poor whom most MF supporters and practitioners bear in mind and heart to help, don’t have enough money to put aside for a specific purpose and for a longer time. They need the money every day, every week, every month, for drinking water, food, washing, electricity, shelter, children’s eduction (and their uniforms and food during the day), daily transport, healthcare, corruption money etcetc. Furthermore, as they have had little exposure to banks, they are afraid and often intimidated to enter banks and open accounts. And then such accounts and certain activities on those accounts cost money.
To enter and stabilise a bank relationship thus requires resolving these challenges. Postbank and national savings programs have always done that with State Deposit Guarantees, large branch networks, government subsidies, mobile banking (cars, motorbikes, boats, vans etc.), low thresholds and fees and with public promotion and education campaigns.
But on the other side, postal banks and national savings programs are not part of the banking sector. They are still often regulated by postal and telecom authorities (or by the Finance Ministry). These organisations and activities thus often are part of organisations suffering from high operational losses and accusations of fraud and corruption as in many other government institutions. Plus they don’t take part in the national payment system thus cannot offer basic transaction accounts, current accounts, checking accounts, allowing transfers and payments with all other regulated financial institutions, local and abroad. To provide the impression that postal banks are banks, government (the owner) and the postal banks have allowed and promote to have deposits and current accounts called “savings accounts” which is of course false.
Poor people require help in safeguarding their daily excess money and in better managing it and planning expenses. Only on that basis can savings and credit be better organised. Integrating poor so far unbanked people in such process first depends on clarity and coherence.
In India and countries with similar situations it might be useful to start explaining the situation why 81% of the people already have a savings account, 25% a “credit account”, why there is no mention of deposits and current accounts, and by whom the future Postal Bank (they have requested a bank license recently) will be regulated and supervised, and who the national savings program.
Its always easy to give out money or a loan than training people to save. To me i think what we need is make people work, do something atleast. If someone is earning savings is much easier to talk about. Lets support people to work