Last week I had the pleasure to visit SafeSave, an unconventional microfinance institution operating in Dhaka, Bangladesh. SafeSave was founded by Stuart Rutherford (among other things, author of The Poor and Their Money and co-author of Portfolios of the Poor) and puts a very interesting twist on the traditional model of credit-led microfinance institutions. (To see Stuart Rutherford discussing SafeSave, see Video IV, at the 5:30 mark.)
SafeSave provides financial services to very poor clients without relying on group meetings, joint liability, guarantors, or even fixed weekly loan repayments. It was set up as an experiment, to learn whether a flexible, non-group lending methodology would be sustainable. In practice, a lot of the common microfinance wisdom is challenged, and it works: the repayment rate, for example, stands at 95 percent. This is just one statistic. More importantly, I think SafeSave’s methodology is a great way of serving clients with a flexible and convenient system that matches their needs in a unique way.
At the heart of SafeSave’s methodology are the 66 collectors, who visit clients at their homes or workplaces every day and provide them with an opportunity to make savings deposits or withdrawals, and repay their loans (clients need to go to the branch for loan disbursement and large savings withdrawals). All collectors are women who come from the same neighborhoods that SafeSave serves. To match clients’ irregular income flows, savings and loan repayments are optional, and clients choose how much they want to save or repay on a given day. Loans therefore do not have a definite term. The collectors record all transactions on smartphones, to help in the accounting.
SafeSave collects savings and extends loans. Savings earn clients six percent interest per year, and interests on loans cost three percent per month. Quick repayment of loans is encouraged by conditioning the increase in the clients’ credit limit by how fast they repay their existing loan. The other product is a long-term savings product. Savers receive higher interest rates by agreeing to not withdraw their money for three, five, seven or ten years.
In the country where Grameen Bank, BRAC, and ASA tower over the microfinance landscape with millions of clients each, SafeSave definitely appears as a small player. As of June 2010, SafeSave provided savings and credit services to about 14,500 clients. After sitting down with Billal, SafeSave’s director, in the head office, I headed out to the Geneva branch to meet some clients. Stepping from the main roads into a narrower street that serves as an open-air market, then into the small pathways of the poor neighborhood SafeSave serves is a unique and humbling experience. The density of the population is incredibly high – which undoubtedly helps make SafeSave’s methodology of having collectors go to clients daily more affordable and sustainable. The small streets are filled with people, and small one-room townhouses line each side. The collector that I followed was hopping from house to house, transacting with clients in almost every other home.
First I met Rupa (all names in this post have been changed). Her house holds a family of eight. Some other families’ homes are even smaller. Houses have electricity (and power cuts), but neither water nor a sewage connection. Water is available from public wells or taps on the edge of the neighborhood. As a result, a lot of household activities happen in the street: cooking, dish washing, laundry (by hand), and showering.
Rupa and her mother have been SafeSave clients since July 2008. The entire family lives on a total income of about Tk500 per week (about US$7) some of which comes from a sari-making business. Yet they have accumulated Tk2,100 (about US$30) in savings and have taken a loan for Tk5,000 (about US$70) to buy the wooden frame on which saris are hung to be decorated, as well as some decorating material.
Then there’s Zahir. Zahir also works in the sari business, but his job is to collect saris from the women in the neighborhood, and re-sell them to shops in the city. Zahir and his family have both savings and loan accounts with SafeSave. When SafeSave’s collector comes, Zahir sometimes puts money down for savings, sometimes repays his loan, sometimes both, and sometimes neither. Interestingly, if he does not have much available money that day, he would rather place it in his savings account than use it as loan repayment – despite the higher interest on loans. From the standpoint of neoclassical economics, this seems like a puzzle - but this is essentially borrowing to save, and a great example of behavioral economics at work.
After a fairly long discussion, one of his neighbors came in the house. I asked him whether he’s a SafeSave client, and he replied that he does not like SafeSave. Surprised, I asked him to elaborate: the flexibility of SafeSave’s methodology is not good for him, he replied, because he needs the pressure of having to make regular loan repayments in order to not fall behind. As we learn from the behavioral economics literature, a little inflexibility can be optimal.
So, in conclusion, while I really believe in SafeSave’s flexible and convenient methodology, it’s also important to remember that one size does not fit all in microfinance – flexibility helps some clients, discipline and regularity helps others, and there is more to invent to serve poor people’s financial needs even better. (And, as I’ll describe in a future post, SafeSave is doing its part with a new product: P9).