What India’s Poor Really Need Is Microsavings, Not Microcredit

BRICS, 24 Apr 2017

Moin Qazi – TRANSCEND Media Service

“When people have reliable access to savings, they don’t risk total destitution if there’s a death in the family or a bad crop.”
— Melinda Gates

 24 Apr 2017 – There’s an old saying about povertyGive me a fish, and I’ll eat for a day. Give me a fishing rod, and I’ll eat for a lifetime.

There are many variations in this theme.

But these days, particularly in India, there’s evidence that one of the most effective tools to fight   poverty may not be   a fishing rod, but a savings account. What we need is a savings revolution.

India’ Prime Minister Narendra Modi was the first world leader who recognized the enormous power of a saving account. His dream project -Jan Dhan Yojana -magically transformed the Indian saving account landscape and set an epochal milestone. Within three years, more than 270 million bank accounts have been opened. Modi himself signaled the new revolution as an end to ‘financial apartheid’.

Policymakers often do not figure in stories of innovation, disruption and change. In fact, they are often seen as stewards of the status quo, enemies of progress. Not anymore. The Jan Dhan Yojana has proved they could be game-changers for financial inclusion. Until now, even state-owned banks have balked at reaching rural and poorer parts of India.

I remember in my secondary school days we saw a bank as a place to save; they would take good care of   money, and might even add a little to it, and perhaps we could take some of the money out one day.

When I first opened the account of my own I received a little booklet, the ubiquitous passbook, in which every deposit and withdrawal was acknowledged by the bank staff. I learned that keeping track of the transactions was the personal hygiene of finance, like brushing your financial teeth. The implicit message, not just for me, but I think for society at large, was that the bank account was the locus of money management. All one’s main financial transactions would pass through the account, and the account would serve as a barometer of our financial health.

So my own and maybe most the people’s 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.

More than three decades back the most popular retail banking product was the pygmy deposit account. Housewives would scrape together few rupees every day to give to a savings collector who would visit their homes. The money was deposited in a bank account that paid interest and was insulated from the daily demands of life.  The depositors squirreled away a decent sum by the end of a year— enough to buy a home appliance. The simple enough motivation was: Saving money, even if it’s only pennies at a time, is a guaranteed way to build wealth.

The field of microcredit was born from a radical concept: poor people, when lent small amounts of money, pay it back in a timely manner. In the meantime, that money can be put to use in ways that help boost income — goat-farming, say, or carpet-weaving — and, ostensibly, raise a family’s standard of living.

The great global rush to pour billions of dollars into microcredit to help the poor all but bypassed the basic building block of financial health: microsavings. The tide is now turning, sparked in part by microcredit’s discredit. We all now know that there may be families who have the savvy to benefit from loans, but there may be many   who can be ruined. On the contrary, every family in the poor world can benefit from a pad of savings. Sadly enough, microfinance is still mainly microcredit, that is, as David Hulme, the great microfinance specialist has been emphasizing ‘microdebt’.

As impoverished borrowers began defaulting on debts at alarming rates in recent years — sometimes with fatal consequences — many organizations began questioning the power of credit. It led to some industry soul-searching and to the rediscovery of a new radical idea: that the thing people really need, more than business loans is a safe place to save their money. It’s what development expert Robert Vogel famously called the “forgotten half of rural finance.”  It is now being universally acknowledged that the most basic and universal instrument of personal finance is: the piggy bank.

One of microfinance’s leading industry experts Elizabeth Rhyne echoes the chorus: “we have discovered that some of the basic premises of microfinance that we took for granted were flawed or incomplete. I was a big proponent of microfinance for many years, and I accepted all these premises — and now when I look back, I think it should have been obvious that there were some problems.”

She says: “People also need savings as a way to build assets; savings is the flip side of credit. If you have more savings, you need less credit. And if you have more savings, you can qualify for more credit.

Access to the right financial tools at critical moments can determine whether a poor household is able to capture an opportunity to move out of poverty or absorb a shock without being pushed deeper into debt. The poor don’t need simple banking tools; they need   tools that can help them navigate their complex financial lives that are marked by many financial needs and inconsistent income.  The reasons for erratic income streams are many, including seasonal unemployment related to the agricultural labor cycle. Given the variability   of their income, the poor   are vulnerable to a number of disruptive events like sickness or death in the family or weather shocks among many others which overwhelm family finances and may prevent families from hanging on to accumulated assets (including productive assets). These adverse shocks can quickly sink families into spells of extreme duress. As a result, the poor lead precarious, anxiety-ridden lives with risks looming much larger than opportunities.

The benefits of microcredit are often extolled, but debt remains debt — it always increases risk and borrowers are sometimes overstretched… Savings help people manage risk. And savings matter, especially to women. Even in traditional societies, no matter how oppressed women are or how unschooled, they are often stewards of the family savings.

Villagers cope with a veritably biblical range of hazards. Nature delivers snakes, scorpions, malaria droughts, floods, hurricanes, tuberculosis and diseases that ravage crops and animals. And then there are the less natural risks from wildly fluctuating commodity prices to environmental shocks. Families are normally financially prepared for education and marriages but health tragedies are usually wild surprises.

Credit can be both an opportunity and a risk for low-income families .It is necessary to open doors, but it can also be a barrier. You can dig yourself into a lot of debt, and that keeps you from moving up financially Loans can be malignant.  Some people shouldn’t take on debt.  Some businesses are too risky.  And the temptation is always present to take these costly loans and scrimp on groceries. When they miss loan payments because a lingering illness keeps them away from their business, they get into regular default cycle .That’s acute over-indebtedness.

Painting all the women in the world as a creative entrepreneur doesn’t actually make them so. They are tenacious, heroic and gritty, all right- given the struggle they lead against   poverty – but we all know that entrepreneurial ventures have a high mortality rate in villages. And   few can deliver the kind of returns one requires to be able to pay back interest rates of around 24% .Given that much of the   money is actually used for consumption, the chances of getting into debt are always high. Many women admit that while they pick up the loan money, their husbands control it; that they lie to the loan officer, or he is complicit, when they say they will start a small poultry business but actually use the loan for dowry for their daughters; that they have been victims of harsh collection practices by ruthless loan officers.

The proponents of savings argue that   what people really need, more than business loans, is a safe place to save their money. It’s what development expert Robert Vogel calls the “forgotten half of rural finance.” Early adopters of what’s sometimes called savings-led microfinance find that the demand for savings accounts far outstrips the demand for loans.  Research shows that when they are offered side by side with loans, people chose savings over loans at rates of up to 12:1.

Saving is a vital way for poor for cushioning such shocks .Savings increase their capacities to manage   cash-flow,, smooth the bumpiness of uneven incomes, reduce the impact of the lean season, become more resilient in the face of unexpected shocks, build assets or invest in a family business and most importantly, perhaps, become empowered to   improve their status in their households and communities.. A safe and smart savings account can transform villagers’ lives.

Savings also serve as a form of self-insurance and enhance the sense of well-being. They are a gateway to self-employment and job creation –   encouraging and enabling families to imagine a future better than the present, and to prepare and plan for that future. Lower-income families can convert savings into home purchases, education and microenterprise.

The key to effective financial inclusion is a safe and confidential savings account for every woman. The older ones advise the younger ones to keep a store of value that other family members don’t know about. When there is an emergency, they will appreciate you.

Despite conventional wisdom, poor people actually do save, even if it’s just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors, buying livestock or other physical goods such as jewellery or construction materials. This surprising diversity of savings mechanisms is in fact because none of them is reliable and safe.

For many, the answer is to tie up money in livestock, which can be sold if necessary .In agricultural economies which are served by patchy banking networks that make access to banking quite difficult, the most preferred investment is a cow. There are   seven ways a cow can help poor people restrict spending and save:

  • Indivisibility – you can’t sell only a leg,
  • A waiting period – the cow can’t be sold immediately,
  • A financial penalty – there are costs involved in buying and selling a cow,
  • Mental labeling – the cow invites clear associations to what people save for,
  • Peer pressure – the whole town will know if you sell a cow, and everyone may question your financial judgment and start asking to borrow money,
  • Perceived production – the cow’s milk production raises the mental stakes of selling it,
  • Social meaning – cows can represent deep cultural beliefs, divinity or fertility or completeness of family.

The cow model demonstrates the mental thinking of a large segment of savers and provides banks an idea of how they should tailor products. A cow also produces milk and fertilizer, which families can sell. It may give status to the owner, or be a religious symbol. It fulfils what the savers want as “commitment-savings accounts” (CSAs), which attempt to tie people’s hands to prevent myopic spending.

However, the poor could benefit from safer and more stable ways of building financial security than physical items that may lose their worth or risk being stolen. They also want products that suit their living patterns. Financial products designers hardly want to do the hard work of first understanding how the poor think, followed by designing suitable products. They would rather design products with generic features then persuade the poor to adjust to them.

The institutions that promote credit, to the exclusion of savings, place poor clients in an agonizing financial conundrum. To finance a child’s primary school, clients must take on debt; they cannot save. To deal with a health emergency or family food shortage, to finance weddings, funerals or social ceremonies, they must keep borrowing again and again. To get essential gadgets also they have to borrow .all at insane rates of interest that keeps them on the debt treadmill giving institutions owe poor people a safe, flexible place to save. By itself, this cannot free them from the tangled web of poverty. But it targets their vulnerabilities directly and increases their freedom .savings is a vital prerequisite for emancipation from poverty

We must think beyond the standard microcredit model. Modern microfinance—savings and insurance, and more flexible credit products—often has generated larger impacts than simple credit,” says Dean Karlan   the well known microfinance researcher, and founder of Innovations for Poverty Action. “Financial services can make important differences in people’s lives, but we need more innovation and evidence to determine what is best to do, and meanwhile we should set our expectations appropriately.”

As Governor of Reserve Bank of India, Raghuram Rajan emphasized that credit should follow and not lead.  “Savings habit, once inculcated, not only allows the customer to handle the burden of repayment better, it may also lead to better credit allocation,” according to him.


Moin Qazi, PhD Economics, PhD English, is the author of the bestselling book, Village Diary of a Heretic Banker. He has worked in the development finance sector for almost four decades in India and can be reached at moinqazi123@gmail.com.


This article originally appeared on Transcend Media Service (TMS) on 24 Apr 2017.

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