A recent article posted on the website of The Globe and Mail, a Canadian newspaper, describes microsavings as a critical facet of microfinance and a way of offsetting “microcredit’s discredit.” It is argued that savings are less risky than credit and cheaper for clients and financial institutions, with proven demand from poor people and a still-limited supply. According to the article, a number of institutions are working to promote a savings culture and expand the sub-sector. The Bill and Melinda Gates Foundation, a US-based nonprofit organization, has committed USD 500 million to develop savings services and mobile banking in developing countries. The World Savings Bank Institute (WSBI), a banking association based in Belgium, expects the number of savings accounts that are used by poor people worldwide to double by 2014. Nongovernmental organizations, including CARE International and Oxfam, are expounding the benefits of community-based savings models in places where formal institutions are scarce [1].
According to a report by CGAP (Consultative Group to Assist the Poor), microfinance institutions (MFIs) and other financial service providers may be able to minimize administrative costs through mobile banking systems and generate profits from savings account fees and by cross-selling microinsurance and microcredit. Stuart Rutherford, author of Portfolios of the Poor and co-founder of Bangladesh-based nonprofit SafeSave, defines microfinance as “a good package of financial tools including the basic loan, day-to-day savings and long-term savings to deal with life-cycle needs and emergencies” [1].
As a balance to the potential upsides, the Financial Access Initiative, a US-based consortium of development economists, recently published an article that analyzes some of the limits and risks of savings. When savings accounts do not offer interest or other attractive terms, target populations may not be motivated to use the accounts. The fact that savings do not noticeably appreciate from day-to-day, which economics refer to as hyperbolic discounting, can also be a disincentive to saving meaningful sums of money. Another concern may be the security of deposits, especially over the long run, as financial institutions in developing countries may not provide deposit insurance or have proven records of solvency. Regulation would have to be enacted in some countries to permit deposit-taking and ensure the security of deposits and information. And finally, inflation remains a threat, as poor people may consider physical assets like gold or livestock to be safer stores of value [2].
By Rohan Trivedi, Research Associate
About The Financial Access Initiative (FAI):
The Financial Access Initiative (FAI) is a consortium of development economists at three universities in the US, New York University (NYU), Yale University and Harvard University, who research the expansion of access to financial services for low-income individuals. The initiative, which was launched with a USD 5 million grant from the Bill & Melinda Gates Foundation in late 2006, is housed at the Wagner Graduate School of Public Service at NYU. The Initiative is led by Managing Director Jonathan Morduch of NYU, Director Dean Karlan of Yale University and Director Sendhil Mullainathan of Harvard University.
About The Bill and Melinda Gates Foundation:
Based in the US, the Bill & Melinda Gates Foundation provides grants to organizations in approximately 100 countries with the aim of enhancing health care, reducing poverty and expanding access to education and information technology. As of September 2009, its endowment totaled USD 34 billion. The Bill & Melinda Gates Foundation’s Financial Services for the Poor initiative focuses on providing people with secure places to save money. To support this initiative, the foundation works with financial organizations to increase access to technology (point-of-sales devices, automated teller machines, etc.) and to forge partnerships among mobile phone companies, banks and microfinance institutions. It also supports the startup and growth of new banks in “difficult markets”.
About The World Savings Bank Institute (WSBI):
The World Savings Bank Institute (WSBI) is an international banking association that represents 110 savings and retail banks in 92 countries, as of August 2011. WSBI helps its member financial institutions develop relationships with global agencies like the International Monetary Fund (IMF), World Bank Group and CGAP (Consultative Group to Assist the Poor). In addition, WBSI is trying to leverage global financial experience to help its member institutions offer appropriate and comprehensive financial services to individuals and businesses.
[1] The Globe and Mail: “What poor people really need is a safe place to put their money”, http://www.theglobeandmail.com/news/world/what-poor-people-really-need-is-a-safe-place-to-put-their-money/article2099001/
[2] Financial Access Initiative Blog: “Is the Potential of Savings Being Overhyped?”, http://financialaccess.org/node/3771
MicroCapital Universe Profile: Financial Access Initiative (FAI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Financial+Access+Initiative+%28FAI%29
MicroCapital Universe Profile: Bill and Melinda Gates Foundation, https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=Bill+and+Melinda+Gates+Foundation
MicroCapital Universe Profile: World Savings Bank Institute (WSBI), https://www.microcapital.org/microfinanceuniverse/tiki-index.php?page=World+Savings+Bank+Institute+%28WSBI%29
Browse the MicroCapital Universe and add your entry to the wiki at https://www.microcapital.org/microfinanceuniverse/
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