THERE’S an old saying about poverty: give me a fish, and I’ll eat for a day. Give me a fishing rod, and I’ll eat for a lifetime. There are several variations in this theme.
But these days, there is a general view that one of the most effective tools to fight poverty may not be a fishing rod, but a savings account. What we need is a savings revolution.
I remember in my secondary school days we saw a bank as a place to save; they would take good care of money, and might even add a little to it, and perhaps we could take some of the money out one day.
When I first opened the account of my own I received a little booklet, the ubiquitous passbook, in which every deposit and withdrawal was acknowledged by the bank staff. I learned that keeping track of the transactions was the personal hygiene of finance, like brushing your financial teeth. The implicit message, not just for me, but I think for society at large, was that the bank account was the locus of money management. All one’s main financial transactions would pass through the account, and the account would serve as a barometer of our financial health.
So my own and maybe most the people’s first view of a financial institution was that it was a place to save. Borrowing might come later, 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 not be the same for ‘the poor’?
The truth is that much of the world is in crisis today because of debt, too much borrowing, not enough saving.
More than three decades back the most popular retail banking product was the pygmy deposit account. Housewives would scrape together few rupees every day to give to a savings collector who would visit their homes. The money was deposited in a bank account that paid interest and was insulated from the daily demands of life. The depositors squirreled away a decent sum by the end of a year— enough to buy a home appliance. The simple enough motivation was: saving money, even if it is only pennies at a time, was a sure way to build wealth.
The field of microcredit was born from a radical concept: poor people, when lent small amounts of money, pay it back in a timely manner. In the meantime, that money can be put to use in ways that help boost income — goat-farming, say, or carpet-weaving — and, ostensibly, raise a family’s standard of living.
The great global rush to pour billions of dollars into microcredit to help the poor but bypassed savings. which has been the most trusted basic building block of financial management. The tide is now turning, sparked in part by microcredit’s discredit. We all now know that there may be families who have the savvy to benefit from loans, but there may be many who can be ruined. On the contrary, every family in the poor world can benefit from a pad of savings. Sadly enough, microfinance is still mainly microcredit, that is, as David Hulme, the great microfinance specialist has been emphasising ‘microdebt’.
As impoverished borrowers began defaulting on debts at alarming rates — sometimes with serious consequences — many organisations began doing a soul searching. It led to the rediscovery of a new radical idea: that the thing people really need, more than business loans is a safe place to save their money. It is what development expert Robert Vogel famously called the ‘forgotten half of rural finance.’ It is now being universally acknowledged that the most basic and universal instrument of personal finance is: the piggy bank.
One of microfinance’s leading industry experts Elizabeth Rhyne echoes the chorus: ‘we have discovered that some of the basic premises of microfinance that we took for granted were flawed or incomplete. I was a big proponent of microfinance for many years, and I accepted all these premises — and now when I look back, I think it should have been obvious that there were some problems.’
She says: ‘People also need savings as a way to build assets; savings is the flip side of credit. If you have more savings, you need less credit. And if you have more savings, you can qualify for more credit.
Access to the right financial tools at critical moments can determine whether a poor household is able to make use of an opportunity to climb out of poverty or absorb a shock without being pushed deeper into debt. Given the variability of their income, the poor are vulnerable to a number of disruptive events like sickness or death in the family or weather shocks among many others which upset and overwhelm family finances and may not allow families to a longer hang on to their precious assets (including productive assets). These shocks can quickly sink families into spells of extreme duress. As a result, the poor lead precarious, tension-ridden lives
with risks looming like perennial shadows.
The benefits of microcredit are often extolled, but debt remains debt — it always increases risk and borrowers are sometimes overstretched. In fact experience the world over has shown increasing instances of debt turning ruinous and malignant in the hands of inexperienced borrowers.
Savings involve little risks and not much expertise in financial management. Even in traditional societies, no matter how oppressed women are or how unschooled, they are often stewards of the family savings.
Savings have been the mainstay of the impoverished and villagers cope with a veritably biblical range of hazards. Nature delivers snakes, scorpions, malaria droughts, floods, hurricanes, tuberculosis and pests that ravage crops and animals. And then there are the environmental and vocational risks arising out of changes in market climates. Families are normally financially prepared for education and marriages but health tragedies are usually wild surprises.
Credit can be both an opportunity and a risk for low-income families. It is necessary to open doors, but it can also be a barrier. You can dig yourself into a lot of debt, and that keeps you from moving up financially. It may become a deepening hole .Loans can be malignant. Some people are not good enough at handling debt. Some businesses are too risky. And the temptation is always present to take these costly loans and scrimp on groceries. When they miss loan payments because a lingering illness keeps them away from their business, they get into regular default cycle; it soon leads to acute indebtedness and makes life stressful for the entire family.
Painting all the women in the world as a creative entrepreneur does not actually make them so. They are tenacious, heroic and gritty, all right- given the tenacity with which they face poverty – but we all know that entrepreneurial ventures have a high mortality rate in villages. And few can deliver the kind of returns one requires to be able to pay back interest rates of around 24 per cent. Given that much of the money is actually used for consumption, the chances of getting into debt are always high. Many women admit that while they pick up the loan money, their husbands control it; that they hide the facts from the loan officer, or he is complicit, when they say they will start a dairy but actually use the loan for dowry for their daughters; that they have been victims of harsh collection practices by ruthless loan officers.
One problem the poor often have in accumulating savings is lack of easy access to savings accounts where they can deposit money. The money is kept in a tin at home, and is easily spent when a neighbour, who is in difficulty, approaches for help. By taking a loan from a micro-financier to buy a needed asset, and then making regular mandatory weekly payments out of her income, the housewife borrows to save – she no longer has spare cash lying around for others to fritter away.
Saving is a vital way for poor for absorbing various shocks to which their precarious lives are more vulnerable .Savings increase their capacities to manage cash-flow,, smooth the bumpiness of uneven incomes, reduce the impact of the lean season, make them more resilient in the face of unexpected shocks, build assets or invest in a family business and most importantly, perhaps, empower them to improve their status in their households and communities. A safe and smart savings account can transform villagers’ lives.
Savings also serve as a form of self-insurance and enhance the sense of well-being. They are a self-employment and job creation – encouraging and enabling families to imagine a future better than the present, and to prepare and plan for that future. Lower-income families can convert savings into home purchases, education and microenterprise.
The key to effective financial inclusion is a safe and confidential savings account for every woman. The older ones always advise the younger ones to keep a store of value that other family members do not know about. When there is an emergency, they will understand your wisdom and appreciate you.
Despite conventional wisdom, poor people actually do save, even if it is just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors, buying livestock or other physical goods such as jewellery or construction materials. There is this surprising diversity of savings mechanisms because none of them is reliable and safe.
For many, the answer is to tie up money in livestock, which can be sold if necessary — in agricultural economies which are served by patchy banking networks that make access to banking quite difficult, the most preferred investment is a cow. There are seven ways a cow can help poor people restrict spending and save: indivisibility – you cannot sell only a leg, a waiting period – the cow cannot be sold immediately, a financial penalty – there are costs involved in buying and selling a cow, mental labelling – the cow invites clear associations to what people save for, sheer pressure – the whole town will know if you sell a cow, and everyone may question your financial judgment and start asking to borrow money, perceived production – the cow’s milk production raises the mental stakes of selling it, social meaning – cows can represent deep cultural beliefs, divinity or fertility or completeness of a family. The cow model demonstrates the mental thinking of a large segment of savers and provides banks an idea of how they should tailor products. A cow also produces milk and fertilizer, which families can sell. It may give status to the owner, or be a religious symbol. It fulfils what the savers want as ‘commitment-savings accounts’ (CSAs), which attempt to tie people’s hands to prevent myopic spending.
However, the poor could benefit from safer and more stable ways of building financial security than physical items that may lose their worth or risk being stolen. They also want products that suit their living patterns. Financial products designers hardly want to do the hard work of first understanding how the poor think, followed by designing suitable products. They would rather design products with generic features then persuade the poor to adjust to them.
The institutions that promote credit, to the exclusion of savings, place poor clients in bondage. To finance a child’s primary school, clients must take on debt; they cannot save. To deal with a health emergency or family food shortage, to finance weddings, funerals or social ceremonies, they must keep borrowing again and again. To get essential gadgets also they will need to borrow. at insane rates of interest that keeps them on the debt treadmill since there is no other choice. Institutions should understand that they owe poor people a safe, flexible place to save. With it alone, they cannot free them from the tangled web of poverty. Savings is a vital prerequisite for emancipation from poverty.
We must think beyond the standard microcredit model. ‘Modern microfinance—savings and insurance and more flexible credit products—often has generated larger impacts than simple credit,’ says Dean Karlan the well known microfinance researcher, and founder of Innovations for Poverty Action. ‘Financial services can make important differences in people’s lives, but we need more innovation and evidence to determine what is best to do, and meanwhile we should set our expectations appropriately.’
Moin Qazi is the author of Village Diary of a Heretic Banker. He has spent more than three decades in the development sector.
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