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Microfinance in focus: time for a change in financial service delivery to the poor

In recent weeks, microlending’s appeal as a panacea in the fight against poverty has been thoroughly challenged as droves of debtors refuse to pay back loans in the Indian state of Andhra Pradesh. Although microlending has often encouraged potential long-term economic growth by  enabling entrepreneurship, it is becoming increasingly apparent that microlending is not a universal ‘magic bullet’ for fostering long-term economic growth and human development. Recent studies suggest that microsavings could lend themselves to the cause more effectively.

Written by Julia Winkler, graduate student at Berlin School of Economics and Law and GIM intern

Reacting to current events of massive defaults of micro borrowers in the Indian state of Andra Pradesh, the Gates Foundation recently announced a five year, US$500 million Global Savings Fund in a strategic shift aimed to improve the product design and access to financial services for those living in poverty. “Savings is the most neglected financial service available to the poor” according to Joyce Lehman, the Program Officer at the Financial Services for the Poor unit at the Bill & Melinda Gates Foundation.

The recent Microfinance Impact & Innovation Conference 2010 in New York City foreshadowed this shift as the focus of discussion revolved around product design and the results of controlled tests. In line with these concerns, the central theme consisted of how financial services can be tailored to effectively work for the poor instead of against them.   Raymond Anderson of the Standard Bank Group of South Africa delivered a presentation on Information and Credit Markets entitled ‘The Credit Scoring Toolkit’. Mr. Anderson pointed to the explicit need for savings mechanisms as part of a more balanced microfinance model. In line with Anderson’s argument, practitioners and economists argued that a paradigm shift in focus from lending to savings is needed. This will be a challenging process however, as most MFIs, do not focus on savings; of 166 MFIs surveyed in 2009, only 27% offered savings products while 100 % offered credit.

Scientific evidence backs up the significance of microsavings as it can potentially lead to mobilized local savings rates. According to a CGAP Donor Brief on Deposit Services for the Poor, Credit often serves the same purposes as savings for the poor, but it is riskier, usually more expensive and often unavailable as appropriate deposit services. The poor often prefer to save and are even willing to pay to do so. Savings may in fact be more important than credit in helping the poor to raise incomes and reduce risk. It can be argued, however, that the income impact may take longer to realize with savings.”

Long-term results of so-called ‘randomized control trials’ (RCTs) were also presented at the conference. Such trials are shedding light on how savings products can provide different benefits for users in varying ways and timeframes. Ultimately such RCTs were presented as useful tools for MFIs to test the demand for financial services and their impact on people’s lives which can potentially lead to more demand-driven financial products as an outcome.

Apparently, this important shift of the perception of microfinance was overdue. Numerous practitioners and scientists now argue that MFIs should not as previously simply focus product impact, but modify their attention to the complexities of product design in order to meet borrowers’ needs in the long-term.

The knowledge platform of the Growing Inclusive Market Initiative publishes case studies which explore the impact and viability of such savings projects. The case study of Russia’s Forus Bank serves as an example of successful implementation of private savings facilities. Another case study examines the impact of rural banking access by ANZ Bank to savings accounts in Fiji.