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In the village of Danja, in eastern Niger, Kanai Garba holds the savings box for her village savings group. (Josh Estey/CARE/Josh Estey/CARE)
In the village of Danja, in eastern Niger, Kanai Garba holds the savings box for her village savings group. (Josh Estey/CARE/Josh Estey/CARE)

What poor people really need is a safe place to put their money Add to ...

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.

These services allow low-income people to deposit small amounts of money - as little as a few cents a week - for future use, typically without minimum balance and no fees. Small-scale saving is a vital way for the poor to cushion themselves from unexpected events like bad weather or a bout of illness. It can smooth the bumpiness of uneven incomes and help people build assets without getting overly indebted.

But often in the developing world, people's only options are to stash bits of money under floorboards, sew it into clothing or stick bills into the bamboo of homes to guard against a bad harvest, buy an asset like a cow, or hold weddings and funerals. These informal methods, though, leave savers vulnerable to theft, fire or loss.

Financial institutions have been missing in action on the savings front, as services have been deemed too costly and cumbersome to administer. Regulatory rules in some countries make it tricky to accept deposits. So the microfinance revolution that rippled around the world focused squarely on the lending side of the ledger - largely overlooking microsaving.

The tide is now turning, sparked in part by microcredit's discredit. In November, the influential Bill and Melinda Gates Foundation pledged $500-million to expand the savings sector in the developing world, signalling the shift in emphasis. The money will support projects that bolster institutional savings services, explore branchless banking and research formal and informal financial tools.

About 90 per cent of the world's poor lack access to formal financial tools. The World Savings Bank Institute, which represents 112 savings banks, aims to double the number of savings accounts held by poor people by 2014. In places where banks and microfinance institutions are scarce, particularly in sub-Saharan Africa, village savings groups - community clubs that pool savings and sometimes lend - are spreading, often with the help of agencies such as Oxfam, the Aga Khan Foundation and CARE. And researchers are ramping up efforts to study how best to deliver affordable savings products to the poor.

Demand for savings services far exceeds supply in the developing world, defying the myth that low-income people can't or won't save. Rather, research shows when the poor are offered savings accounts and loans from the same institution, they favour savings at rates of up to 12 to 1.

Savings accounts come without the risk of indebtedness, which is at the heart of microcredit's troubles. Hot investor money flooded the sector, particularly after the 2006 Nobel Peace Prize to its most prominent champion, Muhammad Yunus. But the rush of growth also brought scandal. India's Andhra Pradesh state hit a crisis last year as some borrowers took out loans from multiple lenders and weren't able to repay. Some committed suicide. In Nicaragua and Bolivia, activists have launched "no pago" campaigns to protest against high interest rates.

A reset in the sector is welcome news to Stuart Rutherford, the modern-day pioneer of microsavings who has spent almost 40 years on three continents studying how the poor manage their money. He has never bought the notion that microcredit alone is the magic bullet to lift people from poverty.

"Dr. Yunus, bless him, was guilty of tending to make the world believe that all you have to do is lend some money to a poor person, and presto! - she comes out of poverty," says the U.K. author of The Poor and their Money. "But microfinance - 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 - are the basic platform builders."

Deo Seimu is using savings as his platform. The 42-year-old farms organic spinach, onions and marrow on his small patch of land in Kisewe, a village 45 minutes from Dar es Salaam. He is also experimenting with tomatoes and cabbage, produce that he takes to the local supermarket to sell.



"The business is doing well … but there's a shortage of water. I would like to buy a small water pump, and have my own bore hole, to have the water pumped," the father of six says in an interview.

A common narrative would see him get a microcredit loan to buy his pump. Instead, Mr. Seimu, is part of a village savings circle, a group of 15 members who put aside $3 or $4 a week in a savings pool and meet every Saturday morning to discuss how to manage the pot. Mr. Seimu has saved about $200 so far that will go toward a pump, bore hole and small power generator.

The savings circle helps him reinvest in his land, generating an income that allows him to pay school fees. It also helps him employ other people, and he says it strengthens the whole community's finances.





"Helping people save their way out of poverty can be much cheaper and less risky than helping people borrow their way out of poverty," concluded Yale University economics professor Dean Karlan in a paper last year.

The catch is the cost. It is much easier, and quicker to make money from lending, whereas small savings accounts can be unprofitable.

But that's not always the case. A study last year by the Consultative Group to Assist the Poor, based on two institutions in the Dominican Republic and Uganda, found microsavings can generate profits through fees and cross-sales of other products to clients. Technology, such as mobile phones and the Internet, is also reducing administration costs.

Banking to the poor has undergone several shifts through history, the most recent being the Yunus wave which built microcredit, says Toronto-based microfinance consultant Brett Hudson Matthews. The next wave "hopefully will finally finish the job of creating what poor people really need: true financial institutions that cater effectively to them on both sides of the balance sheet, tapping all the lessons of historic experience and all the benefits of modern technology.





Mr. Rutherford, meanwhile, is hoping the tide doesn't shift too much, where donors jump on the savings bandwagon and ditch credit. "I get a little edgy if I think people are setting these up in opposition to each other," he says. "A full suite is essential. It's not that one is the good one, and the other is the bad one."



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