Savings without interest and free loans? More innovations from SafeSave

In a previous post, I wrote about my visit to SafeSave in Dhaka. SafeSave also has a cousin organization, called Shohoz Shonchoy (“Easy Savings,” in Bangla), that operates in rural Bangladesh. Shohoz Shonchoy employs the same flexible methodology as SafeSave, with collectors visiting clients every day to allow clients to make financial transactions from their homes or workplaces. Shohoz Shonchoy has been providing a fascinating product since 2007. Product 9 (P9) incorporates many new insights into poor people’s ways of managing their financial lives, and makes it easy for them to save.

The product works this way: when clients receive a loan, one-third of the loan amount is immediately placed in a savings account (the client only receives two-thirds of the loan amount in-hand). After repaying the full amount, clients are eligible for a new loan for a higher amount. The savings do not earn interest, but the loans are also free.

As you can imagine, free credit attracts a lot of attention and interest from potential clients. Yet, what clients seem to most value are the savings. For example, a significant minority of P9 clients do not use the loans: they repay the two-thirds of the loan amount as soon as they receive it, and pay back the savings part little by little. Kalim, Shohoz Shonchoy’s manager, estimates that 25 percent of clients are in this situation, though it is a rough estimate and others think this is high. Part of the reason for doing this may be that clients want to quickly go through several loan cycles to increase the credit limit. But most of the clients I visited talked of the opportunity to have savings rather than to take loans.

P9 also helps poor rural Bangladeshis save by enforcing a commitment mechanism. Savings withdrawals are subject to a five percent fee if withdrawals are made before savings reach Tk20,000 (about US$285). Withdrawals are free after Tk20,000. The goal is not mainly to make money from clients, but to provide a restriction that creates a disincentive to pulling money out of the account, thereby helping to increase savings. And clients seem to appreciate it; most of the clients I talked to would not give away the commitment feature if they could. For example, Anika (all names in this post have been changed) uses P9 to save for her daughter (the account is in her daughter's name), and told her husband that there is fee for withdrawal until the savings reach Tk60,000 because that is her personal goal.

Clients of P9 also have access to interest-bearing, but restriction-free, savings accounts from Shohoz Shonchoy; the fact that they like P9 is a testament to the service that it provides (and, of course, the value of “free” loans). Another client I talked to, for example, uses the P9 product to save up to Tk20,000, then withdraws the money, places it in another of Shohoz Shonchoy’s savings account that bears interest, and starts saving up again with his P9 account.

In the next post, I’ll explore some of the ways in which P9 challenges traditional economic theory.