The Next Step for Microfinance: Taking Deposits

By Barbara Kiviat


Some 30 years ago, the field of microfinance was born from a radical concept: poor people, when lent small amounts of money, will 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. Now another radical concept is starting to take hold: that the thing people really need, more than business loans, is a safe place to save their money. It's what development expert Robert Vogel calls the "forgotten half of rural finance."

To be clear, loans aren't going away. A quick look back at last year's credit crunch reminds us how important lent money can be to economic activity. The reason loans came first in microfinance, though, wasn't grand strategy but pragmatism. In most parts of the world anyone can make a loan, including the non-profits that trek into developing countries to reach people traditional financial institutions have ignored. The same isn't true of savings accounts and other banking products, which are typically heavily regulated.

Yet ask people what they want, what's more important for day-to-day living in a Ugandan village or Indian slum, and a safe place to keep their money often trumps business lending. Early adopters of what's sometimes called savings-led microfinance find that the demand for savings accounts far outstrips the demand for loans. Bank Rakyat in Indonesia, for instance, has 10 savers for every one borrower. "Low-income people need a variety of financial services," says Bob Christen, director of the financial services group at the Gates Foundation, which has given tens of millions of dollars in grants to savings initiatives.

This, of course, makes perfect sense. Simply think of your own saving and borrowing habits. In fact, even under the construct of microcredit—which, by definition, lends money for business use—borrowers often spend part of their loan on things that would typically be paid for from a checking or savings account. Survey data from Bank Rakyat shows that micro-borrowers use funds for household needs, like school fees, home repairs and holiday expenses, some 30% of the time. The issue, importantly, is not that poor people don't have savings, but rather that they tend to save in hard-to-tap assets, like livestock and jewelry. To free up cash, the solution is often to pawn possessions—and to pay someone a fee in the process.

The range of work the Gates Foundation has found to fund shows the breadth of organizations interested in creating a better way. Some money is going to help existing savings institutions and credit unions gather more deposits, but a lot is also funding development in technology meant to make savings easier to access and accounts less costly to maintain. "Agent-based banking," in which financial services are delivered though existing institutions—like pharmacies and newsstands—is one key area of research. Another: mobile banking. In Kenya, for example, the telecom M-Pesa has seen smash success with its mobile-phone-based banking, which includes a way to save.

A number of traditional microfinance institutions, many of which have evolved into formal banks, are also assigning renewed importance to gathering deposits. A few years ago, Grameen, one of the industry's largest players, loosened rules around its savings accounts to better accommodate how clients wanted to use them.

But not all microfinance institutions have been quick to drum up savings. While some microfinance institutions, especially well-established players in Latin America, rely heavily on depositor funding, many other organizations find it easier to run their microlending businesses with money from investors. Microcredit is such a hot topic in the realm of finance that even with the credit crunch, many institutions are awash with money from investors drawn to the notion of making a profit while simultaneously furthering a social mission. The idea of gathering deposits seems time-consuming and expensive without much pay-off.

So some development outfits are essentially going back to the beginning and building new organizations with savings at the center. Since 2005 Oxfam America has been creating savings groups in villages in Mali, Cambodia, Senegal and El Salvador. Each group has about 20 members—in the tradition of microfinance, almost all of them are women. The members contribute a small amount of money each week, and then, from this pot of savings, lend out sums to those members who need loans. The program is based on a model that's common throughout the world—such groups are called tandas in India and tontines in West Africa—and designed for Oxfam to eventually bow out.

"What we've done is taken the paradigm of microfinance and flipped it inside out," says Jeffrey Ashe, Oxfam America's director of community finance. "We're creating autonomous groups and defining sustainability in a whole new way." In many ways it's microfinance back to its roots—small, rural, community-based. But it also represents the next step forward.