We’re excited about the idea of microsavings as opposed to microlending. But it isn’t enough to see that an organization offers microsavings. We need to know:

1. Are savings services being provided relatively efficiently? How many clients are served per dollar of operating expenses?
2. Are clients able to access their funds when they need them? We have heard anecdotal concerns about client dissatisfaction with the difficulty or bureaucracy involved in accessing savings. In addition to the proxies for satisfaction discussed in our earlier post, we’d like to see the “turnover” of client accounts: does money go in and out, or sit stagnant?
3. What are the interest rates/fees on the accounts? Excessive fees would concern us, but so would extremely generous interest rates, which would make the program less like a savings account than like giving out cash.

Some of the questions at our earlier post (regarding profitability, client income levels, and client satisfaction) also apply.

Portfolios of the Poor tells a story you won’t hear from a typical microfinance charity:

Sankar was a landless, illiterate rickshaw driver, whose wife had Grameen membership. They had borrowed from Grameen Bank a few times - in fact one loan had helped him buy his rickshaw. Suddenly his wife told him they would have to open a GPS [savings account] in order to get the next loan. He was suspicious, he told us. “And now?” we asked. He chuckled. “Now, we try to avoid loans and just use the GPS.” Pressed to explain, he said that his income was small but sufficient for their daily needs and they had nothing to invest an expensive loan in. Their priorities now were for their children, and the GPS seemed, compared to borrowing, a cheaper, more relaxed, longer-term way of providing for their future (marriage for the girl, a business for the boy). Like Jharimon, Sankar borrowed sometimes and saved always. “Grameen should have done this years ago,” he said, echoing what many others had told us. (Page 170; emphasis mine)

What do the poor need more, savings or loans? There isn’t much information on this question - something I find pretty shocking given that microfinance is decades old. But the limited evidence seems to point to savings, at least for the poorest clients:

• The general impression given by Portfolios of the Poor (quoted above), the only systematic attempt I’m aware of to see how the poor manage their financial lives.
• A 2001 survey of SEWA Bank clients, which found that the bank was “far more important as a depository for savings in early 1998 than it was as a source of credit” (page 79) and that “39 per cent of borrower households were below the $1 a day line, compared to 53 per cent of saver households and 67 per cent of [non-client] households.” (page 81) This is the only study we’ve located directly assessing savings vs. loans clients at an MFI - please let us know if you know of more - but it is consistent with charities’ and scholars’ off-the-record comments to us that the poorest clients tend to be more interested in savings than in loans.
• The strongest studies of microfinance, which show weak/no effects for two traditional microcredit program and positive effects for a savings program.
• The purely logical argument that savings provides the same “risk management” benefits as loans, without the same risk of harm that comes with putting poor people into debt at high interest rates. (David Roodman among others makes this argument.)

But loans are far more prevalent

Looking at the 537 MFIs listed on MixMarket under US-based networks (source data), we note that

• 517 of 537 appear to have introduced loans before they introduced savings; 0 of 537 appear to have introduced savings first. (This may be an artifact of changing data reporting standards, but if Mix collected loans data before savings data, that fact is also indicative).
• In their most recent year, 503 of 537 MFIs had more outstanding loans than savings; 34 of 537 had more outstanding savings than loans.

Why?

Why are loans so overwhelmingly common compared to savings, when the little available evidence points to a greater need for savings?

Is it for purely logistical reasons? Savings and loans each present different challenges, but the necessary “innovations” seem to have come first and been expanded more for loans.

Or is this another case where the best program loses to the best donor story?