When we think about poor people and the role that microfinance plays in their lives we tend to think of microcredit, or small loans. But there’s another financial service that is as equally important to the poor: savings. You might be surprised those who earn so little are able to save, but they can, and they do.
What are microsavings?
Microsavings is a subset of microfinance, and refers to ways “unbanked” individuals (those traditionally excluded from formal financial services) can accumulate useful sums of money. It might be difficult to believe that people who live on small incomes have anything left over to put away. But it turns out that even households with meager sources of income highly value having a safe place to save and accumulate money – and will go to great lengths to do so. But saving isn't always easy. Because the sums accumulated are small, it takes time for a useful sum of money to be built. As a result, other pressing needs may take precedence over savings, making it difficult to accumulate a usefully large sum . . .
Read MoreAt FAI, we spend most of our time thinking about financial access overseas. Yet, increasingly, we can’t ignore the conversation happening right here in the U.S. Last year, the FDIC released its first-ever survey of un- and under-banked households, which revealed that some 9 million American families have neither a savings nor a checking account, and an additional 21 million families that do have such accounts also patronize non-bank financial outfits such as check cashers and payday lenders.
Households operating outside the financial mainstream are nothing new, but the attention they are receiving certainly is. The past few years have seen a rush of interest from policy makers, socially minded nonprofits, financial educators, journalists, and even big banks hoping to add to their retail ranks. Conversations about the unbanked tend to revolve around two main premises. First, that the reason people don’t have bank accounts is because they don’t realize they’d be better off if they did. Second, that the host of financial firms people use in lieu of banks—such as check cashers, pawnshops, payday lenders, rent-to-own stores, and tax refund advance outfits—exploit customers with higher-than-warranted interest rates and wind up trapping people in a cycle of debt.
Read MoreThis is a guest post from Aparna Dalal, independent consultant and former FAI Director of Special Projects.
A new briefing note by the Microinsurance Network’s Insurance Education Working Group (of which FAI is a member) outlines emerging practices in risk management and insurance education. The note, targeted at practitioners, outlines basic principles that practitioners should incorporate into their education programs such as:
1. focusing on risk management and insurance content;
2. relating education to people’s risk exposure;
3. using a mix of channels and tools;
4. delivering ongoing education as opposed to one-time programs;
5. linking education with products;
6. leveraging existing institutions and pool resources; and
7. incorporating monitoring and evaluation activities from the start.
Read MoreWhat do Jack the Ripper, the shortage of affordable housing, and cataracts have in common? They are all problems that can and have been addressed by social finance. Jonathan Morduch recently shared his wisdom on the subject during the Chief Economist Talk series at the World Bank.
Read MoreRecently there has been a lot of talk within the industry about the commercialization of microfinance institutions. In 2008 the wildly successful IPO of Mexico’s Banco Compartamos demonstrated that the microfinance industry can yield massive profits and is worthy of private investment. But it also raised questions about whether such financial success is reason for concern, whether microfinance is in danger of mission drift, and if operating on a for-profit basis is in the best interest of the poor households microfinance claims to help.
To understand the implications and concerns regarding commercialization, it is essential to first appreciate the different types of microfinance providers: banks, for-profit NGOs, and non-profit, NGOs. From an economic standpoint the most significant difference among the various providers, is that commercialized entities (banks and for-profit MFIs) are able to distribute profits as they like after taxes. Non-commercialized MFIs (non-profit MFIs), must reinvest profits back into their organization. The MFIs also differ in regard to mission, clientele, services offered and regulation requirements they must meet. Banks are subject to stricter regulations and make loans that on average are about four times larger than loans from NGOs. Since poorer customers generally demand smaller loans, average loan size is a rough proxy for the poverty level of customers. On average, microfinance banks thus tend to serve a substantially better-off group of borrowers than do NGOs. Banks also serve fewer women as a share of their customers. For-profit NGOs have a very similar profile to banks, but are not subject to the same rigorous regulation and tend to be less profitable . . .
Read MoreCould you live on $1 a day? In New York City, probably not. What about in rural Guatemala? Inspired by The Portfolios of the Poor, four American college students attempted to do just that. They spent nine weeks living and working in a rural Guatemalan village. Their goal? To understand and document how the world's poor, quite literally, live on a dollar a day.
Their first step was to try to replicate the living conditions of poor farmers by taking a microfinance loan of $300, using it to rent a plot of land on which they grew crops to repay the loan installments. And these guys did their homework . . .
Read MoreLast week I was a guest in Seattle at the Bill & Melinda Gates Foundation Global Savings Forum. The Forum brought together a diverse and thoughtful group of people working to push the global savings agenda. Stuart Rutherford and I had the chance to talk about lessons from the financial diaries and Portfolios of the Poor, and found that our job was made much easier given that several of speakers ahead of us on the agenda, includingMelinda Gates, had already done an excellent job of communicating important messages about how the poor live their financial lives.
The big news out of the Forum was, of course, the Gates Foundation’s unveiling of their $500 million Global Savings Fund, a collection of grants to help create savings accounts for the poor. The grant builds on the argument that the poor can save, do save, and want to save – but they seek better ways to do so effectively.
During a break, I was talking to an academic friend who asked me – “Yes, but who would ever question that idea?” It was a reminder that it’s easy to forget how contentious the idea is that the poor can save . . .
Read MoreThis is a guest post from Aparna Dalal, independent consultant and former FAI Director of Special Projects.
If you are studying or working in the field of microinsurance, the annual International Microinsurance Conference, jointly hosted by the Munich Re Foundation and theMicroinsurance Network, is the place to be. The 6th installment of the conference was held in Manila last week. This was the third conference I’ve attended, and in many ways, the most interesting one. While challenges remain, various organizations are successfully implementing innovative products and processes. Below are four areas of development that I found particularly interesting . . . .
Read MoreThis is the third post in our Microfinance 101 blog series. The purpose of the series is to help non-practitioners and people in general who are interested in microfinance to understand various aspects of the field. This blog deals with microinsurance.
Microinsurance is a financial tool that helps poor households mitigate risk and plan for the future. It enables them to cope with unpredictable and irregular incomes, while also preparing them for financial emergencies that threaten their livelihood. One of the major problems faced by poor households is that due to low and unpredictable incomes, they lack a financial cushion. Living so close to the margin means that it doesn’t take much to push them over the line from poverty to destitution. When you live on less than $1 or $2 a day, an unexpected trip to the doctor or a bad harvest can quickly become a catastrophe. Microinsurance offers a way for poor households to manage risk and deal with the ups and downs of life.
So why doesn’t everyone use microinsurance?
Read MoreWe're tweeting a chapter-by-chapter review of SKS founder Vikram Akula's new book A Fistful of Rice: My Unexpected Quest to End Poverty Through Profitability. Follow us on Twitter for the bottom line on each chapter.
Read MoreThe microfinance situation in South India has put the industry into crisis management mode. David Roodman offers today's update.
Last week, I spoke to one of the most respected analysts of microfinance in India, and he argued that the sector was now "too big to fail". Roodman cites Daniel Rozas who warns that we ought to at least think about what failure might look like.
All of this has brought up the specter of the US subprime meltdown. Misaligned incentives?
Read MoreThe Bill and Melinda Gates Foundation has been at the forefront of the pack in pushing for better access to savings accounts for poor households. A new paper from Jake Kendall helps us understand why access to better ways to save is such an integral part of financial access and building financial security. He lays out the challenges faced in establishing the 'impact' on households of increased access to savings instruments and then hypothesizes about the impacts that one might expect from improved access to savings instruments. These include the creation of useful amounts of cash, as a hedge against unforeseen disasters and as a useful buffer to help smooth daily consumption expenditures. He highlights the pros and cons of formal versus informal savings tools, comparing them along the dimensions of privacy, accessibility, reliability and the risks and costs of each. The note describes experiments undertaken by other researchers to investigate the impact of different types of savings products among individuals and the impacts on women in particular . . .
Read MoreWelcome to Microfinance 101 at the FAI!
If you're interested in microfinance, but don't necessarily want to learn about graphs, differential equations and statistical techniques then you have come to the right place. We will regularly be posting blogs that explain the core principles of microfinance.
This week's blog is a basic introduction to the subject of microsavings.
When we think about poor people and the role that microfinance plays in their lives we tend to think of microcredit, or small loans. But there’s another financial service that is as equally important to the poor: savings. You might be surprised that people living on $1 or $2 a day are able to save, but they can, and they do . . . .
Read MoreIt may seem callous to segment people living on under $2 a day—there’s no doubt these people are poor—but its an important thing to do. The daily realities of life for someone living on less than a dollar a day are quite different from someone earning $1.75 a day. Income also doesn’t capture the whole picture. Assets, in the shape of anything from furniture to jewelry to land to livestock, or the lack thereof play a big role in the daily quality of life of people living under the $2/day threshold. That’s why within the microfinance community there is a distinction between the poor and the ultrapoor. While there are many different definitions that vary by country and culture, you can think of the ultrapoor as women-headed households (often widows) with little or no land or livestock who earn under a $1 a day. Microcredit has never been a good product for the ultrapoor, who unlike those slightly higher up the ladder are close to living hand-to-mouth.
BRAC, an NGO commendable for its commitment to monitoring, evaluation and research, created a program to target the ultrapoor with the hope of helping them “graduate” into microfinance clients. The BRAC ultrapoor program involved, among other efforts, transferring assets (such as livestock), cash transfers, education (such as health/hygiene, animal husbandry, financial literacy) and assistance with building savings. The results of BRAC’s ultrapoor program have been promising, prompting the replication of the basic model in 10 different contexts, with assistance from CGAP and the Ford Foundation.
Results of evaluations from two of those replications in India (programs run by Bandhan and SKS Foundation) were presented at the conference. Both of the programs were explicitly modeled on the BRAC program.
Both programs showed encouraging gains for the beneficiaries . . .
Read MoreWe featured the perspectives of some of the conference organizers on Day 1’ s highlights. Here are some additional perspectives on Day 2:
Jonathan Morduch, Financial Access Initiative
1. As Rich Rosenberg pointed out there is good reason to be concerned that over-indebtedness is a real problem. At this point, though, we don’ t have a good definition of how much debt is too much for different clients, much less data. As a result, we're flying blind. I think Rich’ s presentation could be a Nouriel Roubini moment for microfinance.
2. There are a lot of puzzling things about the behavior of borrowers and how their businesses do or don’t grow . . .
Read MoreIndia is the biggest, fastest-growing microfinance market anywhere. And it's at risk of hitting a bad crisis. This will be surprising if you haven't been paying attention to the global press for the past 3 weeks. The last big microfinance news from India centered on the millions of dollars earned by investors following the SKS IPO. Vinod Khosla made the front of The New York Times for his $100 million plus pay-day.
Just a few weeks ago, most of the who's who of microfinance in India got together for a conference in Mumbai. The agenda gives no sense of what the rest of October would bring.
But a spate of suicides by microfinance customers, in response to alleged harassment by microfinance loan collectors, has turned attention back to conditions in villages -- and it's not all pretty. Regulators are now rushing to clamp down on microfinance institutions.
Shloka Nath has the best piece I've read, online today in Forbes India . . .
Read MoreNew data shows M-PESA is now reaching most of the poor, unbanked, and rural populations in Kenya – and measurably improving their lives.
M-PESA is a mobile-phone based electronic payment and store of value system which in just over three years has managed to acquire 57% of the Kenyan adult population as customers, and who between them do more money transfers domestically than Western Union does globally. Though money transfer services and savings accounts are nothing new, M-PESA’s real innovation is that customers can deposit and withdraw cash at any of 20,000 stores – that’s 20 times the number of bank branches in the country!
Many in the field of financial inclusion believe M-PESA has potential as a development tool because it significantly lowers transactions costs for intra-family remittances, commerce, utility bill payments and government welfare transfers and because it has the same functionality as a basic bank account, giving it great potential to expand financial inclusion . . .
Read MoreCredit risk is a reality for banks around the world. It is even a fairly predictable reality, if sometimes ignored (Exhibit A: Present dynamics in the US). Banks often know what percentage of their loan portfolio is at risk and they price that risk through higher interest rates for riskier clients, among other ways. Microfinance institutions (MFIs) do not have the same luxuries. They lack the information about their clients necessary to differentiate, they already get enough flak about their “high” interest rates, and they are constantly fighting to keep operations costs low, a difficult task if you increase complexity. It’s no wonder, then, that low client default rates have become a kind of holy grail for microfinance providers. When you feel powerless to change so much of what you do, its useful at least to have a clear measure of commercial success.
And yet, could the rigidity of the typical micro-credit product be partially responsible for the fact that access to credit has limited, if any, income effects for micro-entrepreneurs?
Read MoreAnother great summary blog on last week's Microfinance Impact & Innovation Conference by Laura Starita over at Philanthropy Action:
What We Don't Know About Microfinance
by Laura Starita
Both days one and two of the conference were largely dedicated to communicating the results of recent impact studies—i.e. what we “know” in microfinance. Yet the first session of Day 2 took a step back to discuss what we don’t know, but should. Panel participants were Chris Dunford from Freedom from Hunger, Rich Rosenberg from CGAP and Abhijit Banerjee from JPAL.
Chris Dunford spoke first, giving a thoughtful presentation that effectively amounted to a distillation of the disadvantages of RCTs for practitioners. He called for a broader focus on evaluation and not just impact studies. Evaluation, in his mind, is the practice of answering definitional questions (What do we mean by microfinance?); value questions (Are the poor overindebted? Are interest rates too high?) and decision making questions (Why don’t policy makers and donors consider the results of RCTs when making funding decisions?) as well as impact questions (Does microfinance improve the lives of the poor?).
Read MoreChris Dunford from Freedom from Hunger opened, arguing that as well as continuing to churn out the impact studies, we also need to be thinking about how we measure and evaluate the quality of delivery. A good intervention might just be delivered badly, especially if it is an innovative intervention which is new to the implementer. We also need to think harder about using qualitative data.
Richard Rosenberg of CGAP made the case for focusing on the potential losers from microfinance. We know that there can be heterogeneous impacts. What if a positive impact on average masks some serious negative consequences for a few? Is this acceptable? We need to learn more about over-indebtedness.
Abhijit Banerjee (MIT) posed the puzzle:
Why is there low borrowing and low business growth when we find that the returns to capital are so high? Perhaps the most persuasive argument is for non-linearitiesin business growth. There may be high returns to capital at the margin, but they could drop dramatically as firm gets even a little bigger. Alternatively, already overworked individuals simply might not want to spend even more time building a business.
David Roodman emphasized the importance of qualitative research and how much we have learnt from Portfolios of the Poor. He also noted the limitations of only measuring one to two year impact. Imagine if we had done an RCTon home mortgages in the US in 2002/2003 and found great short-term impacts. That would not tell the whole story.
--
In the second session, Erica Field took a look at small business loans in the US, and how they differ fromtraditional microcredit loans. Loans in the US are typically more flexible with grace periods, which increases business growth but also default. An experiment with microcredit clients found that offering grace periods made them behave more like small businesses in the US – there was more investment and business growth, but at the cost of more default.
Does financial education work?
Read More
