Micaela Browning | KF17 | Mozambique
“A penny saved is a penny earned.”
Ah, the old adage; the bane of the average American adolescent’s existence. My mother, in particular, constantly sung the praises of fiscal responsibility and self-discipline. By the age of eleven, I had my own ATM card and bank account (my meager savings consisted of reluctantly deposited babysitting money and crumpled wads of birthday cash).
Though young, I generally understood that the bank would “guard” my money until I wanted to spend it, much like my best friend would “guard” my swing at recess until I returned from the bathroom. I also had a vague concept of a nebulous character called “interest” which would wave a wand and magically transform my $43.28 into $43.34 by the year’s end.
Although my consumption-hungry preteen self could not appreciate it at the time, I was exceedingly lucky to grow up in a country in which I could begin saving – safely – at an early age. Truthfully, I had never considered what it would be like to live somewhere where saving was implausible, impractical, or insecure. Until now.
For the next three months, I will be working with Hluvuku-ADSEMA, a microfinance institution (MFI) serving predominantly rural clients in southern Maputo province, Mozambique. These are exciting times for Hluvuku; its portfolio has grown substantially, the client base is expanding rapidly, and a new branch in Moamba is opening as I pen this blog post.
Senhor Mavimbe frequently prepays his Kiva loans, which he has used to expand his home (pictured) to accommodate his growing family.
More clients, loans, and branches generally warrant an expansion of services. And this is precisely what Hluvuku has in the pipeline. Pending approval from the Central Bank, Hluvuku hopes to implement a voluntary (opt-in) savings program by 2013.
But, why are we talking about savings? I thought microfinance was about loans?
Although we often conflate the terms “microcredit” and “microfinance,” the latter is an umbrella term defined as the provision of a broad range of financial services to low-income clients (including savings), while the former refers exclusively to loans. In modern financial parlance, “microfinance” is almost always used in lieu of “microcredit,” reflecting the fact that MFIs now understand that successfully serving the un- and underbanked necessitates a multifaceted approach to poverty reduction — not just access to credit.
But, I thought that microfinance was about serving low-income populations? How can a low-income client save money? And, if they are really able to save, why don’t they do so until they have enough to invest in their business? Then they wouldn’t even need to take out a loan, right?
It’s more complicated than that. Research has demonstrated that low-income people across the world can and do save money; albeit in informal and insecure ways. This explains the continued popularity of rotating savings and credit associations (ROSCAs) in sub-Saharan Africa and South Asia. However, formal savings are often just as constricted as formal credit.
Many of Hluvuku’s clients -– who reside in one of the least densely populated areas in Southern Africa — do not live within a reasonable distance of a commercial bank branch. Even if they did, most would be faced with the same laundry list of issues posed by taking out a loan with a traditional financial institution, including prohibitively large minimum deposits and identification requirements.
It’s simply not profitable for most banks to approve savings accounts with initial deposits under U.S. $500, and they certainly won’t approve savings accounts without proper ID. For example, of the eight Kiva clients I visited this week, over half had no form of state-issued identification. No ID, no bank account.
Additionally, many MFI clients have been or will be exposed to negative shocks that can devalue savings — or eradicate them entirely in worst-case scenarios. A Zimbabwe-style episode of hyperinflation, for example, can render a savings account virtually worthless in a matter of hours.
Instead of a saving fiat money, many low-income people choose to acquire a tangible asset with intrinsic value (say, a piece of gold jewelry) that can be liquidated easily when needed. However, such items are subject to theft, do not earn interest, and may depreciate considerably over time, and are thus a poor substitute for savings accounts.
Dona Maria struggled to finance medical expenses and funerary arrangements for four family members that recently fell ill and passed away.
Gender issues can also play a role in discouraging formal savings mechanisms. In Mozambique, as in other patriarchal societies, low-income women face unique challenges when it comes to accumulating liquid assets. Unfortunately, it is not uncommon for the husband to drain any savings his wife has managed to accrue, under the premise that he is the sole proprietor of his household’s wealth.
Ok, that makes sense. We definitely need savings accounts. Let’s make them mandatory for MFI clients!
The debate over compulsory versus voluntary savings accounts for MFI clients is a sticky one. On one hand, compulsory savings — which are tied to loans and require a client to deposit a certain percent of his or her repayments in the account — help the client to finance major expenditures, smooth consumption, and serve as an asset against which larger loans can be secured.
Usually, compulsory savings employ a strict deposit schedule, and clients can only withdraw the funds at a fixed date in the future (typically, the maturity date of the loan). On the lender’s end, compulsory savings is beneficial in that it is a guaranteed source of funds which can be used to increase the loan portfolio, deepen outreach, and help the MFI move toward financial sustainability at a relatively low cost.
Proponents of compulsory savings believe that savings should be an integral part of an MFI’s loan methodology. Compulsory savings, it is argued, helps instill client with the value of fiscal discipline, and increases the likelihood that loan repayments are made on time .
However, many of us who work in the field are of the opinion that low-income people do not lack the willpower to save so much as they lack the proper resources. Hluvuku’s clients, for example, are often able to prepay their loans with monthly savings accrued from their businesses, suggesting that they indeed have surplus funds which could benefit from the provision of interest-earning savings accounts.
Additionally, by restricting withdrawals, compulsory savings can undermine a client’s ability to manage risk in the event of a personal emergency, natural disaster, or external shock. Dona Maria (pictured above), for example, has suffered four deaths in her family in the past few years. She explained to me that she is hesitant to take out another loan from Hluvuku until she recovers financially from the costs of medical treatment and funerary arrangements.
Clients like Dona Maria could benefit greatly from voluntary savings programs that allow account holders to save securely and withdraw funds as the need arises. Stories like Dona Maria’s are far from rare, and many MFIs have thus begun to recognize the benefits of voluntary savings programs. Voluntary savings — which allow the client to choose whether or not to open a savings account — generally allow the client to withdraw and deposit on-demand.
Clients with voluntary savings accounts need not have an outstanding loan to be eligible, nor be prior clients of the MFI in most cases. Voluntary savings, therefore, caters well to the three most important concerns of low-income savers — liquidity, convenience, and security — while conferring the same benefits to the lender afforded by compulsory savings. However, this type of highly liquid deposit product does increase the likelihood of fraud and illiquidity, so it’s imperative that MFIs that choose to incorporate voluntary savings are cognizant of the risks it may pose.
Both compulsory and voluntary savings programs require the MFI to subject itself to prudential regulation and its associated costs; in most countries unregulated MFIs are not allowed to accept public deposits. This is a topic for an entirely different post, but it’s worth mentioning that the jury is still out on whether there is trade off between formalization of MFIs and adherence to their social missions.
So, in conclusion…
I am proud and excited that Hluvuku has opted to include savings accounts in its product portfolio, and feel confident that voluntary savings in particular would be excellent choice for Hluvuku’s client base. I look forward to keeping all of you Kiva fans out there updated on our progress, so stay tuned!
Micaela Browning is a Kiva Fellow working with Hluvuku-ADSEMA in Mozambique.