As you are probably tired of hearing me say, I am evaluating microfinance from three perspectives. A pattern is emerging: microsavings looks pretty good in all three perspectives. The one randomized trial of savings returned a positive verdict from the perspective of development-as-proven-poverty-reduction. Meanwhile, fraud-free savings serves people much as credit does, yet without raising debt trap fears---good for development-as-freedom. And taking savings turns a microfinance institution into a true bank, intermediating between savers and borrowers. That is development-as-organization-building. Pretty brilliant of me and Nicholas Kristof to figure this out, huh?Actually, when it comes to advocating savings, Dale Adams is the granddaddy of us all. His publications on finance for the poor go back to at least 1971, and some more recent writings of his just got me thinking about the tensions between supporting microcredit and microsavings. (You can find him on devfinance.)Read page 436 of the official 50-year history of the World Bank by Devesh Kapur, John P. Lewis, and Richard Webb (the fat red book over my shoulder in the photo at right):The idea that Adams rebelled against, which you can read about on the previous page of the book or in my draft chapter 4, is that subsidized, low-interest loans help the poor. Once orthodoxy, that school of thought was overturned in the 1970s by the proposition that financial programs work best when they operate businesslike, charging enough interest to cover costs, doing savings along with loans. Subsidized loans are too easily captured by the rich. And once the discipline of balancing the books is lost, the emphasis shifts to getting money out the door. People figure out that default will go unpunished. Only a fool repays.In fact, while I have singled out Adams, he was not alone, for the simple reason that the failure of big subsidized credit programs from Brazil to the Philippines in the 1960s was too glaring too ignore. Other important figures were Claudio Gonzalez-Vega, who settled along with Adams at Ohio State University; Robert Vogel who taught there too, and who in 1984 famously dubbed savings the "forgotten half of rural finance"; J.D. von Pischke, who helped spread the new ideas at the World Bank, and was later involved with the Germany-based ProCredit group of micofinance banks; Edward Shaw, who is cited above; and Edward B. Rice, who organized the devastating 17-volume Spring Review of Small Farmer Credit in 1972--73 at USAID and later led the internal evaluation unit of the World Bank.Haven't heard of them? There are a few reasons for that beyond our normal tendency to forget history. Most of these men are critics more than playwrights, and not as good as marketing themselves as your average microcredit group, as you can see from the links I've affixed to their names. The Rural Financial Market paradigm isn't as photogenic as "give a poor woman a loan." In addition, many of their writings are nearly inaccessible today. To read them you have to go to a library! And not just any library. OK, the volume with Vogel's paper can be bought online...for $150. Meanwhile, you can read, online and free, brand new CGAP reports about mobile phone banking, as well as the primary account of Jonathan Swift's lending in the 1720s. Funny media world we live in.At any rate, when advocacy of what we now call microsavings began in the early 1970s, it fought an uphill battle even within the rebellious community. The rebellion was against a form of credit, so people mostly talked about credit, which is why Vogel could still write of the "forgotten half" in 1984. Even many of the young Turks assumed poor people were too poor to save. In an e-mail to me, Adams recalled calling for savings in 1973 at a wrap-up conference for the Spring Review juggernaut. His paper elicited laughter from the discussant, a USAID official.But the idea did not die. In the early 1980s the Indonesian government decided to reform the failing rural development program at its Bank Rakyat Indonesia (BRI). In the context of a close relationship with the U.S. government, Indonesia consulted a USAID-financed team from Harvard. Anthropologist Marguerite Robinson was on that team and documented the story at length. Robinson makes clear the importance of the private Indonesian bank BDB as a model for BRI (see my chapter 4). But perhaps out of diplomacy with respect to Indonesia, Robinson is vague on the intellectual role of USAID. I am in the process of tracing that genealogy. I think one strand traces to Adams. Today BRI is the global goliath of microsavings, with 20 million accounts. The only other microfinance institutions that come close, leaving aside postal banks, are ASA and the Grameen Bank in Bangladesh, each with nearly 8 million accounts. Grameen got serious about voluntary savings in the late 1990s and today holds 50% more in deposits than it has lent out. This reform was partly a response to ASA's move into savings in 1997, which Stuart Rutherford links to the inspiring example of BRI---and to advice from westerners. Though smaller, some ProCredit banks are also seriously into savings.So here's the scene I see: Microsavings is a movement tracing in part to western, particularly American, donors and researchers. It has succeeded spectacularly in places. Yet it has not spread as widely as microcredit.One can imagine good, tough reasons for the disparity. Start-up non-profits generally should not and are not entrusted with "other people's money" via licenses to take deposits from the public; yet they can give out loans. (Exceptions are made for organizations that take savings even as they lend, as a kind of collateral.) In addition, letting people put in and take out money when they please cuts against the mass production strategy of microcredit, exemplified by ASA, which historically required members of borrowing groups to run through standard sequences of loans such that weekly payments were fixed over time and within the group, in convenient multiples of 25 taka. So perhaps it is best for microfinance institutions to grow with credit first, then expand into savings. Perhaps credit is a fitting pioneer species, the lichen that colonizes bare rock and allows the more elaborate successor species, savings, to take root.Or maybe not. Adams says something worse is also at work: easy money from public and private donors to support microcredit. Why should a microfinance institution bother with the administrative and regulatory hassle in maintaining thousands or millions of small savings accounts when it can raise grants and low-interest loans from eager overseas investors?
Most countries prohibit organizations from mobilizing voluntary deposits unless they have official permission from banking authorities to do so. Still, one has to wonder why more organizations in the core of the microfinance industry didn’t start much early to push for permission to accept deposits. Was it because participants were too pessimistic about capacities to save, could provide too few incentives, or thought it was too costly? Overtime, I suspect that all of these factors help explain some of the slow movement toward seeking permission to accept deposits. Still, I believe that something more fundamental is involved. Perhaps that something could be called Shaw’s Law. ...Shaw’s Law states that the availability of inexpensive outside funding discourages deposit mobilization. Its corollary is that deposits will only be mobilized when there is little or no outside funding available to potential deposit takers. Verifications for this law can be gleaned from a review of successful deposit mobilization efforts as well as from the experience with subsidized and targeted lending efforts. Could anyone imagine, for example, that the farmers associations in Korea, Japan, and Taiwan would have had much interest in mobilizing voluntary deposits if the Japanese government had offered these associations access to subsidized funds? Similarly, would the BRI have encouraged their units division to mobilize deposits if the Central Bank of Indonesia had continued to allow BRI ample access to concessionary discount lines? In the same vain, would the financial cooperatives in the Dominican Republic, Guatemala, Honduras, and Peru that were prompted to mobilize more deposits by [US]AID-funded technical assistance projects have turned their backs on deposits if AID or other donors had offered them subsidized funds?...In the early 1990s I saw a dramatic example of this in Egypt where AID spent a good deal of money trying to reform a traditional agricultural bank, including stimulating more deposit mobilization. These efforts were later undercut by a large World Bank loan that provided funds to the bank more cheaply than the bank could obtain them from depositors. The agricultural bank quickly lost interest in the difficult task of mobilizing voluntary deposits.This strikes me as an extremely important challenge. When does support for microcredit undermine microsavings, the superior service? If the concern is valid, what are the implications? I can imagine a few:
- Socially minded investors, public and private, should favor support for young microcreditors.
- Investors should continue to support the sort of technical advice that helped BRI, ASA, and others
- They should foster programs for local intermediation, such as Village Savings and Loan Associations and credit unions.
- They should deemphasize what today probably accounts for the bulk of money going into microfinance: large chunks of capital for mature, microcredit-dominated organizations. They should develop metrics of "maturity" and phase out support using them.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
