Financial Inclusion and the Morality of Thrift

Expansion of financial inclusion through savings has grown immensely as a focal point in microfinance policy and leadership circles over the past couple of years.  Recent market crises where overindebtedness played a major role have only increased the urgency of this objective.  

The focus isn’t unwarranted.  As Tim Ogden points out in an earlier post, the upside of asset accumulation is obvious, while there’s no comparable risk of over-saving as there is with over-indebtedness.  

Much research has been done to examine the savings practices of the world’s poor, with the implicit objective of developing better savings services.  Some of the most enlightening findings come from Portfolios of the Poor, and from Stuart Rutherford’s work with SafeSave in Bangladesh.  One interesting finding from this line of research suggests that expanding financial inclusion through savings doesn’t end with offering opportunities to save, but also requires creating obligations to save.  

These studies show that poor savers greatly demand commitment savings products, through which they commit to save specific amounts over a given period.  Not surprisingly, informal savings vehicles, such as ROSCAs, function in exactly that way, by obligating participants to save specific amounts at each rotation.   None of this should be surprising – it is human nature to discount future demands in favor of current ones.  We have a word for this:  procrastination.  People intuitively understand this tension and seek out artificial mechanisms to turn those challenging long-term demands into a series of short-term ones.  

Yet there is one major mechanism that seems largely missing in today’s environment:  the morality of thrift.  Anyone with a living relative who grew up during the turbulent economic period of the 1930s will immediately recognize what such thrift means.  The most thrifty of this generation appear to be downright allergic to any kind of spending, and examples abound of frugal widows with simple backgrounds leaving behind fortunes upon their deaths.  

During the time of financial inclusion expansion in today’s industrialized countries, the language of thrift predominated.  Like today, the founders of the savings movement of 200 years ago were charitably-inclined persons, but unlike their counterparts today, they saw it their mission to educate the toiling masses in desired behavior:

Henry Duncan, one of the progenitors of today’s savings banks (1816):  “It is distressing to think, how much money is thrown away by young women on dress unsuitable to their station, and by young men at the alehouse, and in other extravagances, for no other reason, than that they have no safe place for laying up their surplus earnings.”    

Rowland Burdon, a prominent author on savings (1797):  “The great desideratum, with respect to the maintenance the poor, has always appeared to me to be the encouragement of habits of economy, and of a system of periodical subscription towards their own subsistence.”  

Priscilla Wakefield, founder of the world’s first savings bank (1805):  "It is not sufficient to stimulate the poor to industry unless they can be persuaded to adopt habits of frugality... [F]or those of intemperate habits [e.g. drinking -DR], ready money is a very strong temptation to the indulgence of those pernicious propensities."

(Hat tip to David Roodman, for his invaluable coverage of this history.) 

Though the result of their efforts was largely the same as with today’s advocates of expanding financial access – namely, the establishment of various savings services for the poor – it is unimaginable that organizations like CGAP or FAI might make statements such as these.  After all, to encourage thrift among the poor is to acknowledge that by not being thrifty, they are in some way deficient. We may talk of financial education, but exhortations towards thrift would be seen as simply bad form, reminiscent of colonial missionaries.

And yet, seemingly inappropriate as it might be for today’s sensibilities, such general morality can be a great motivator.  After all, the very purpose of morality is to protect us against harmful impulses, and impulse spending falls very much in that category.  And the value for such morality is as present today as it was 200 years ago.  Though it is rarely spoken out loud, it is widely known that drinking and gambling by men continues to consume large amounts of poor households’ earnings in many countries.  This is also one reason why women are often seen as the preferred customers for microfinance.  No less importantly, widespread adoption of the morality of thrift would help reduce the need for what are after all inconvenient mechanics of commitment savings.  

Our predecessors 200 years ago were highly successful in expanding financial inclusion.  In theory, we too could encourage thrift.  Yet aside from our discomfort from teaching morality, we are also hampered by another obstacle – microfinance today is a story of credit first, savings second.  Whether it collects deposits or not, every MFI today started as a credit-granting institution.  No less critically, microcredit portfolios contribute the core of MFI earnings, without which few if any MFIs would be able to survive.  The result is then an emphasis on marketing credit, providing sales officers with incentives to make loans, and so on.   

Unfortunately, the spend-now-pay-tomorrow ethos of credit isn’t just inconsistent with thrift – it directly undermines it.  In a prescient essay on the slippery slope of debt, Thomas Dichter refers to research in a French village in the 1950s, where within ten years of the advent of formal credit, villagers who earlier had viewed debt as something shameful and best avoided, came to see such notions as something old fashioned and outright foolish.  Many a microfinance practitioner can relate similar transformations of villagers in today’s developing economies.

Yet the traditional notions of debt as something negative form the very social fabric that underpins thrift.  In general, the greater the social acceptability of debt, the lower the net saving rates.  Thus, for organizations whose existence is predicated on credit, turning around and advocating thrift is inconceivable.  Even if an organization could resolve the internal contradictions, it would take marketing gymnastics to communicate both messages at once, resulting in confusion at best and derision at worst.  

There are organizations that in theory could adopt the strategy of exhorting thrift – village saving schemes, savings and postal banks, and credit unions that are the modern-day inheritors of the savings revolution in the 19th century.  But in reality, they too are unlikely to take up the challenge.  The notion of thrift is simply too outdated.  

Having played the feature role in the first wave of financial access expansion, thrift has retired to become little more than a historical curiosity for today’s onlookers, as quaint and incomprehensible as a frugal 90-year-old widow worth millions.  Yet it doesn’t mean we shouldn’t at least strive to learn from its lessons.   

Daniel Rozas currently works as a microfinance risk specialist based in Brussels. In addition to extensive knowledge of microfinance, he brings with him nearly a decade of experience in mortgage finance in the U.S.