Microfinance, like every other area of finance, has proven itself vulnerable to hype and fad. The long cycle of hyping microcredit seems to finally have run its course (though enthusiasm for microcredit has proved remarkably resistant to reality before). But there’s a new darling of the microfinance world that’s taking over much of the enthusiasm formerly reserved for microcredit: savings.
Savings does have plenty going for it. It’s easy to understand and uncontroversial. Savings doesn’t have the moral baggage that lending and borrowing does. The downside of savings is hard to see. No family ever got caught in a “savings trap” or became “savings slaves.” Meanwhile the upside to accumulating assets is obvious.
Perhaps most important, savings has sound evidence behind it. There’s good data that even those earning around the $1 a day mark do have discretionary income and use various mechanisms to save (See Poor Economics and Portfolios of the Poor). There’s also Pascaline Dupas’s and Jonathan Robinson’s work in Kenya that shows significant gains from savings for female microentrepreneurs (and there are a raft of impact studies which should have results over the next 2 years). That’s a critical distinction between the excitement over savings and the past hype over microcredit which persisted for 20 years before solid evidence of impact began emerging.
But I’m concerned that savings is being overhyped in terms of its possible benefits. There are some substantial limits, it seems to me, to the possible impact of savings:
- Take Up: The tests of savings products that have taken place often show surprisingly high take up rates—but only on a relative basis. In other words, it’s surprising how many people take up what appear to be not particularly attractive savings products, but in terms of the total population take up rates are still very low—around 50 percent. When you consider how low the take up rates for microcredit are—a product that is far more tempting than savings—it’s hard to believe that savings products are likely to quickly reach a large part of the target population.
- Time: The plain fact is that accumulating meaningful assets by savings takes a long time. Our concept of accumulating assets via savings typically involves interest bearing accounts. Given the cost of delivering savings it’s unlikely that many customers will receive significant interest and that makes the timeline for accumulating assets even longer.
- Hyperbolic Discounting: That long timeline runs right into what behavioral economists call hyperbolic discounting, a fancy term for the fact that it’s easier to start saving “tomorrow” than today. Savings are susceptible to the temptation to spend now. Commitment savings products which help people overcome hyperbolic discounting show a lot of promise, but they also add complexity for both providers and customers.
- Security: Savings only works if deposit-taking institutions are trustworthy—and that’s very difficult to maintain. The history of banks until the modern-era is a story of panics and runs on banks when depositors lost faith that their savings were safe. It was not until government-backed deposit insurance proliferated that bank runs became a thing of the past in developed countries. Figuring out the regulatory mix that will provide access to savings accounts (by keeping costs to providers low) with security for depositors (by keeping tight reins on deposit-taking institutions) on a country by country basis remains a huge barrier to microsavings at any significant scale.
- Inflation: It’s not just unsound banks that pose a risk to savers, inflation is also a huge danger. There’s a reason that poor savers today hold wealth in physical assets like livestock and gold—they’re not very susceptible to value erosion from inflation. There are plenty of mechanisms to protect savers from inflation but all of them are costly—and cost necessarily limits outreach.
Finally, we should pause to look at the track record of savings’ impact on poverty. There’s no question that savings is a major part of the development of a middle class and a prosperous, growing economy. But the wide availability of safe, inflation-protected savings in developed contexts hasn’t made a big impact on poverty rates. We haven’t figured out how to make savings products work particularly well for the poor yet. So let’s not assume that this new enthusiasm for microsavings suddenly has answers that have escaped us for lifetimes.