Microsavings 101: How do people save when they earn so little?
Kiva and Financial Access Institute (FAI), a consortium of leading development economists focused on substantially expanding access to quality financial services for low-income individuals, are partnering to bring you a three week educational series on the difference facets of microfinance! The full versions of these articles and the series are available on the FAI website. This week's blog is a basic introduction to the subject of microsavings. Check out the past 101 blog on microcredit and up next week is microinsurance!
When we think about poor people and the role that microfinance plays in their lives we tend to think of microcredit, or small loans. But there’s another financial service that is as equally important to the poor: savings. You might be surprised those who earn so little are able to save, but they can, and they do.
What are microsavings?
Microsavings is a subset of microfinance, and refers to ways “unbanked” individuals (those traditionally excluded from formal financial services) can accumulate useful sums of money. It might be difficult to believe that people who live on small incomes have anything left over to put away. But it turns out that even households with meager sources of income highly value having a safe place to save and accumulate money – and will go to great lengths to do so. But saving isn't always easy. Because the sums accumulated are small, it takes time for a useful sum of money to be built. As a result, other pressing needs may take precedence over savings, making it difficult to accumulate a usefully large sum.
Why do people want to save?
Poor households want to save for some of the same basic reasons that we do: for retirement, sending their kids to school, making large future purchases and to hedge against any type of future uncertainty, like an illness or bad harvest season. Through talking to poor households, researchers discovered that they often used savings for big life events (like funerals and weddings), emergencies (like an illness), opportunities to buy assets that store value for old age (like land and gold), to pay off debt, and to invest in small businesses.
So how do they save?
Some households may have access to a savings account with a microfinance institution (MFI) or a bank. But many don’t have access to formal financial services. Instead, they may use informal ways of saving such as giving money to a neighbor to hold for them, hiding cash in a “safe” place in their home or joining a savings clubs in which members pool together small sums of money to help accumulate a larger sum. In other instances, deposit collectors gather cash from women in a neighborhood, hold it for them and return it at the end of the month after charging a fee for the service.
Obstacles to saving
Informal savings mechanisms can be risky and unreliable. What if the neighbor holding your money steals it? What if your husband discovers the money under the mattress and takes his buddies out for night on the town with it? Informal ways of saving can also be expensive, as in the case of the deposit collector who actually charges you a fee to save. They also don’t guard against temptation in the same way that having your money in the bank does. For example, if you have the urge to buy a new sari or a cup of tea, you're probably more likely to raid your savings from under the mattress than if it's safely in the bank.
Better ways to save
MFIs and other financial institutions can help households save by understanding what kind of savings products are needed: reliable, convenient and flexible.
For more information on the importance of microsavings and how they occur on the ground you can watch this video series in which Stuart Rutherford, co-author of Portfolios of the Poor and founder of SafeSave Bangladesh, discusses important factors in the design of savings (and other financial) products for the poor.