Just Keep the Interest

Several weeks ago, a colleague of mine told me about a recently opened MFI located in South India that uncovered an innovative method of legally offering savings accounts to their clients (I won’t go into the details of how until this has been approved by the government). Even better than simply being able to offer a savings product, it would be cheaply accessible (not a fixed deposit) and offer around an 8% rate of interest. After getting excited about the idea of Indian MFIs finally being able to offer a badly needed service to rural consumers, my next thought was “why offer interest?” Pocketing this money, rather than offering any interest, let alone 8%, might be a great way for the MFI to keep operational costs down and thus offer lower costs for other products. My belief about the irrelevance of interest rates on savings to the rural poor is informed by this account of the massive Indonesian MFI Bank Rakyat Indonesia’s experience with different savings programs. The following excerpt can be found in Morduch and Rutherford’s “Microfinance: analytical issues fro India.”

Bank Rakyat Indonesia has also made convenience, reliability, continuity, and flexibility core elements of its mission. To do this, it underwent a radical make-over in 1983. The bank had started as a government-owned rural development bank in 1968, charged with helping to spur agricultural production. To help both borrowers and depositors, the government mandated that borrowers pay interest rates of 12% while depositors received 15% under the national savings program Tabungan Nasional (TABANAS). The intentions were good but the negative interest rate spread was untenable, and by the late 1970s the bank was suffering huge operating losses. Indonesia de-regulated banks in 1983, and BRI transformed itself with the aim of becoming financially viable without subsidies. The staff turned to the villages to study local financial markets to better understand what households really needed, and in 1986, after a year of field work, BRI rolled out the new “village savings” product, Simpanan Pedasaan (SIMPEDES). It was quickly popular, despite not paying interest at all on small deposits and paying at most 12% for the largest deposits – relative to the 15% returns offered by TABANAS. But while TABANAS restricted withdrawals to two times per month, SIMPEDES offers unlimited withdrawals. Patten and Rosengard (1991, p. 72) argue that “although very few TABANAS savers actually withdraw funds twice a month, this limitation is an important psychological barrier to the people in rural areas, who seem to fear that they will not have access to their TABANAS savings when they need them.”

I love this story because it represents a bank responding to the desires of their clients, and not demanding that clients desire what the banks assume they should want. More on BRI and the SIMPEDES loan can be found in Marguerite Robinson’s “The Microfinance Revolution.”

It is more than a stretch to assume that Indonesian rural savers and South Indian savers are one and the same, but is certainly worth researching. Let’s say this does turn out to be true. Then my attitude is, and this may seem severe, why disburse interest that does not make the product any more attractive to recipients.* Take that money and use it to make other “push” products (products that are theoretically valuable for the client but difficult to sell) more attractive, such as health and crop insurance.

* I realized a few hours after putting up this post that I should have thrown in a caveat. The BRI example does not necessarily mean that their clients did not care about receiving interest on their savings. It only suggests that in comparison with accessibility, receiving interest was not a high priority and the lack of interest in the SIMPEDES product was likely not much of a deterrent to take up.