In 1946 or thereabouts my father took me to the local bank and helped me to open an account. He made something of a small ceremony of it, and he added ten shillings (around two U.S. dollars in those days) to my ten shillings of savings to make it up to one pound.
I do not remember much of the occasion, I was very young at the time, but I certainly do NOT remember that there was any talk of credit or a loan. The bank was a place to save, they would take good care of my money, and might even add a little to it, and perhaps I could (with my father’s permission of course) take some of the money out one day, but even that was not mentioned.
So my own and maybe most readers’ first view of a financial institution was that it was a place to save. Borrowing might come later, but much later, and the purpose of saving was not to qualify for borrowing; it was a useful thing to do for its own sake.
Why should it be any different for ‘the poor’?
Much of the world is in trouble today because of debt, too much borrowing, presumably not enough saving, by individuals, companies, countries and groups of countries. Microfinance is still mainly microcredit, that is, as David Hulme told us sixteen years ago, ‘microdebt’. Microfinance institutions have successfully, and with some recent exceptions quite profitably, extended the same facilities for indebtedness to millions of poorer people.
Now, as if it was some remarkable new discovery, we are wondering whether these institutions should also offer savings facilities. The analogy is imperfect, but is this not a little similar to a teacher wondering after some years of teaching writing, whether she might also teach her pupils to read?
Or perhaps we are in the same position as I was many years ago when I was travelling in the Republic of Ireland and I had lost my way; I stopped to ask an elderly gentleman which was the right way to Galway. He paused, and then replied ‘Well, I am not sure that you should have started from here at all’.
Saving is surely not an optional extra which we may or not add to credit. It is where we should have started, not because it was more convenient or more profitable, or a cheaper way to raise funds, but because it was and still is the most important financial service, particularly for poorer people. The BRAC and Bandhan ‘Targetting the Ultra-poor’ (TUP) programs in Bangladesh and India are successfully reaching and helping very poor people to become less poor. They do this with a range of services, including savings, but credit is not part of the package.
Northern Rock, one of Britain’s major mortgage providers, discovered a few years ago that it was more profitable to focus on lending, on indebting its clients, than to bother with taking their savings as well. The transaction costs of borrowing large sums on the international money markets were far lower. Northern Rock’s dramatic collapse in 2007 demonstrated that this was not a viable long-term business model, but microfinance institutions which focus only on credit are surely making the same mistake.
They may claim that they are only prevented from taking client savings by their lack of a banking license, but there has at least until very recently been little movement away from debt and towards client savings as the major source of funds. The availability of relatively low cost wholesale funding from ‘social’ lenders makes savings mobilization even less attractive. There have of course been a few important exceptions such as the Grameen Bank in Bangladesh. And, of course, Bank Rakhyat Indonesia, which has always acted as a full-service bank and not a client indebting institution.
It is not easy to make this change, to get from the wrong starting place to the right destination, as my Irish informant said. It took KBSLAB, the licensed bank in the BASIX group in India, ten years to bring its savings portfolio to the same level as its loans, because there was four years’ earlier history of lending only.
Nevertheless, the transition must surely be made. It is unlikely that any of the readers of this note would chose as their main financial service provider an institution which only offered credit, and which only allowed them to remain as its clients if they remained permanently in debt to it, apart perhaps from a few weeks of so-called ‘resting’ between paying off one loan and taking another.
Why should we expect the poor to choose differently?
Source: http://www.cgap.org/blog/microfinance-should-have-started-savings
