Why Microsavings?

Why Microsavings?

Microsavings provide a more reliable source of funding for MFIs. According to a donors memorandum from Inter-American Development Bank’s (IDB) Multilateral Investment Fund, there is a trend toward increased reliance on deposits as a funding source for microfinance. The recent microfinance crisis in Andhra Pradesh, India demonstrated that it is dangerous for MFIs to rely mostly on external funding and credit rather than deposits and savings. In one of his recent blog posts, David Roodman mentioned that the political environment is much more challenging for MFIs in India in comparison with Bangladesh. In India, MFIs are not allowed to mobilize savings while in Bangladesh Grameen Bank holds more savings balances than loans; therefore, it is costly for the government to interfere with Grameen's operations in Bangladesh. 

Microsavings allow borrowers to accumulate assets. The poor need a safe place to save in order to accumulate assets instead of taking out more debt. Microsavings provides such opportunities. A paper published by the IRIS Center discusses studies that have been conducted to provide quantitative support for the hypothesis that there is a high demand for savings among the poor.

Various Initiatives in Microsavings

Recently I attended a seminar organized by CARE titled, "From Pennies to Progress: Transforming Lives by Building Assets through Informal Savings-Led Microfinance." This seminar discussed the Access Africa program that is based on the village savings and loan methodology that CARE pioneered in 1991. This program has been especially successful in Africa because it targets the extremely poor in areas with a sparse population and undeveloped infrastructure where few MFIs operate. In addition, Access Africa offers training on financial literacy and health education. This program has been very successful as a first step to financial inclusion for this extremely marginalized and underserved population. Currently Access Africa is partnering with larger commercial banks to overcome the following limitations: Village Savings and Loan Associations (VSLAs) cannot provide a long term place to save because the funds are shared out every year, and borrowers cannot access greater loans because VSLAs have limited amount of funds.

Another interesting initiative has been launched by the IDB. IDB is working to tie Conditional Cash Transfers (CCTs) and remittances to savings. You can learn more from a previous New American Foundation panel, or read my previous blog post. Please review the IDB donor memorandum mentioned above to learn more about IDB's work in this area.

Other microsavings initiatives

• In January 2010 the Grameen Foundation launched a Microsavings Initiative funded by Gates Foundation in India, Ethiopia, and the Philippines.
• Oxfam's Saving for Change program focuses on providing the poor with safe places to save. This program creates community banks where poor can save and borrow, without having to rely on external funding.

Challenges in Mobilizing Savings

• Lack of Developed Infrastructure. It is more expensive for MFIs to offer a diverse product mix because of human capacity, lower interest on savings than on loans, and the inability of many MFIs to obtain a banking license that is required for accepting deposits. Therefore, potential benefits need to be assessed wisely prior to expanding product mix.
• Dormant Savings Accounts. The poor need better information on how to use savings accounts effectively.