Savings the forgotten half of microfinance
By Lennart Båge
Most of the worlds poor lack access to basic financial services that would help them manage their assets and generate income. This is especially true for the 900 million extremely poor people who live in rural areas of developing countries. Good management of even the smallest assets, such as livestock, can be crucial to very poor people, who live in precarious conditions, threatened by lack of income, shelter and food. To overcome poverty, they need to be able to borrow, save and invest, and to protect their families against adversity. With little income or collateral, poor people are seldom able to obtain loans from banks and other formal financial institutions.
Microfinance is one way of fighting poverty in rural areas, where most of the worlds poorest people live. It puts credit, savings, insurance and other basic financial services within the reach of poor people. Through microfinance institutions such as credit unions, financial non-governmental organizations and even commercial banks, poor people can obtain small loans, receive money from relatives working abroad and safeguard their savings.
The microfinance revolution started with the recognition that poor people needed access to loans and that they could use these funds productively. It has also changed the perception that poor people are not credit worthy. Records have shown that, instead, they are a good risk, with higher repayment rates than conventional borrowers. In some of the most successful microfinance institutions, repayment rates are as high as 98 per cent.
As microfinance has evolved, there has been an increasing recognition of the importance of savings, often referred to as the the forgotten half of microfinance. During the 1990s we came to realize that there was a pattern emerging in how poor people were using the very large microfinance networks. In the networks that offered both credit and savings services, there were often as many as five savers for each borrower. While credit is important, it is only one of the many different kinds of financial services that poor people need to improve their lives.
For example, the Unit Desai of Bank Rakyat Indonesia, which has been
one of the most successful providers of microfinance services in the region,
counts more than 28 million savers, for only three million borrowers.
The large financial cooperative networks in West Africa also have many
more savers than borrowers among their members.
It has been argued that savers in those institutions are usually not the poorest people. Although this is true in many institutions, evidence has shown that even the poorest people value and need access to some form of savings. What characterizes the poorest is not only their very small income but also the irregularity of this income. This can actually discourage very poor people from taking a loan that comes with the obligation of a regular repayment schedule. Conversely, data gathered from money collectors around the world show that the poorest people often use their services to save, even when it comes at a high cost demonstrating the importance that poor people attach to saving.
The Microcredit Summit Campaign has the ambitious objective of reaching 100 million of the worlds poorest families by the year 2005. By the end of 2001, more than 2000 microfinance institutions were involved in the campaign, providing financial services, mostly loans, to almost 55 million individuals or groups. More than 21 million of those clients were women.
There is an urgent need for microfinance institutions to improve their ability to reach the poorest families and to satisfy their growing demand for a range of financial services. This includes the safe and flexible savings services that poor people need and value. One way to meet the objectives of the Microcredit Summit Campaign is to help microfinance institutions that are legally authorized to provide simple savings services ensure that these services are available to very poor people.
Although the amounts involved may be small, the loans, savings and insurance options that microfinance offers can give millions of rural men and women an opportunity to find their own solutions.