Microfinance 101: What is microsavings?
Welcome to Microfinance 101 at the FAI!
If you're interested in microfinance, but don't necessarily want to learn about graphs, differential equations and statistical techniques then you have come to the right place. We will regularly be posting blogs that explain the core principles of microfinance.
This week's blog is a basic introduction to the subject of microsavings.
When we think about poor people and the role that microfinance plays in their lives we tend to think of microcredit, or small loans. But there’s another financial service that is as equally important to the poor: savings. You might be surprised that people living on $1 or $2 a day are able to save, but they can, and they do.
What are microsavings?
Microsavings is a subset of microfinance, and refers to ways poor people accumulate useful sums of money. It might be difficult to believe that people who live on so little have anything left over to put away. It turns out, however, that even households with very meager sources of income highly value having a safe place to save and accumulate money – and will go to great lengths to do so. Nevertheless, saving isn't always easy. Because the sums accumulated are small, it takes time for a useful sum of money to be built. As a result, other pressing needs may take precedence over savings, making it difficult to accumulate a usefully large sum.
What do the poor use their savings for?
Poor households want to save for some of the same basic reasons that we do: for retirement, sending their kids to school, making large future purchases and to hedge against any type of future uncertainty, like an illness or bad harvest season. In the households profiled in the book Portfolios of the Poor, researchers discovered that the poor often used savings for big life events (like funerals and weddings), emergencies (like an illness), opportunities to buy assets that store value for old age (like land and gold), to pay off debt, and to invest in small businesses.
So how do the poor save?
Some poor households may have access to a savings account with a microfinance institution (MFI) or a bank. But many don’t have access to formal financial services. Instead, they may use informal ways of saving such as giving money to a neighbor to hold for them, hiding cash in a “safe” place in their home or joining a savings clubs in which members pool together small sums of money to help accumulate a larger sum. In other instances, deposit collectors gather cash from women in a neighborhood, hold it forthem and return it at the end of the month after charging a fee for the service.
One way poor households overcome the challenge of accumulating a usefully large sum is to borrow to save. For example, instead of facing the daily challenge of whether to spend two pennies on a cup of tea or save two pennies with the hope of someday having enough to buy an asset like a piece of land or a gold necklace, they’ll take a loan from a lender or even a microcredit institution to make the purchase. In cases like this, the saver believes they are more likely to be disciplined about saving on a regular basis when there are costs associated with delays or delinquencies in repayment (e.g., social censure, fees for delays in repayments etc.). Rather than relying on innate self discipline, they enforce self control though an external mechanism, in this case through a loan from a money lender or a microfinance institution.
Obstacles to saving and risks
These informal mechanisms can be risky, both because you must trust the person who is hoding your money and because they don't gaurd against temptation in the same way that having your money in the bank does. For example, if you have the urge to buy a cup of tea, you're probably more likely to raid your savings from under the mattress than if it's safely in the bank. Informal saving can also be expensive as in the case of the deposit collector who actually charges you a fee to save. Finally saving informally can also be downright unreliable. You run the risk that your hidden savings will be discovered by a husband who wants to spend it on gambling, that your deposit collector will be robbed or that you will give into your own temptaiton to spend the cash you have on hand.
Better ways to save
Financial institutions can help poor households save by understanding the special needs the poor have for any financial tool – reliability, liquidity and flexibility and creating more reliable financial tools.
For more information on the importance of microsavings and how they occur on the ground you can watch this video series in which Stuart Rutherford, co-author of Portfolios of the Poor and founder of SafeSave Bangladesh, discusses important factors in the design of savings (and other financial) products for the poor.