What about Savings?

As Minakshi pointed out in her blog entry yesterday, low-income communities often use credit as a substitute for other products, such as savings or insurance, to smooth consumption (e.g., weddings, health shocks).  As microfinance continues to grow in India, I believe this problem will become more acute.

Four weeks ago, I came to India to join CMF and learn more about microfinance.  Microfinance, and particularly microfinance in India, is a new topic for me.  And as I learn, one questions keeps popping up in my mind: What about savings?

Microfinance's aim is to increase financial access to low-income households in a manner that will help increase incomes and improve livelihoods, but currently Indian MF institutions typically provide only one side of the fundamental finance equation.  Indian MF institutions readily provide loans, but savings options are scarce.  Innovation is occurring within the industry (e.g., housing loans, insurance products), but activity in the savings space is relatively stagnant.

Granted, many SHGs in India practice group savings, but these savings cannot be used for two key problems low-income households face: day-to-day consumption smoothing and support after economic shocks (e.g., health problems).  Individual savings could help with both the aforementioned challenges, but individual savings products in Indian microfinance seem to be the exception, rather than the rule.

Savings products would meet a demand that already exists, as Stuart Rutherford articulately explains here (Rutherford on the Poor's Savings Needs).  Rutherford provides data and analysis to support his argument that poor people already save, but given the lack of formal options, the amount of savings is below optimal, and most saving that is done is unprotected and informal (e.g., putting underneath one's bed).

Moreover, there are savings models out there worth reviewing, and possibly leveraging.  Rutherford helped start SafeSave, an MFI operating in Bangladesh that has extremely flexible savings products.  SafeSave reps go door-to-door in slums or villages, and clients can put any amount of money into their savings accounts at anytime.  After six months, and meeting a minimum deposit of about US $15, clients receive 6% interest on their savings.  To learn more about SafeSave's savings products, check out page 5 of the case study here.  

I understand that in the early 1990's RBI banned MFIs from offering savings. At the time, the decision made sense; several MFIs would set-up shop, take in deposits, and then close down and run away with the money.  However, the microfinance industry has matured immensely in the past 15 years, and now serves nearly 40 million households.  We should help these microfinance recipients mature along with the industry by providing the with a key economic empowerment tool; easy-to-use individual savings products.