Economist: A better mattress
Microfinance focuses on lending. Now the industry is turning to deposits.
IT IS hard for people in the rich world to imagine what it is like to live on $2 a day. But for those who do, the problem is often not just a low income, but an unpredictable one. Living on $2 a day frequently means living for ten days on $20 earned on a single day. The task of smoothing consumption is made more complicated if there is nowhere to store money safely. In an emergency, richer people might choose between dipping into their savings and borrowing. The choice for the great mass of the unbanked in the developing world is limited to whom to borrow from, often at great cost.
That they can borrow at all is partly due to the rapid growth of microfinance, which specialises in lending small amounts to poor people. Several big microfinance institutions (MFIs) also offer savings accounts: Grameen Bank in Bangladesh is a prominent example. But the industry remains dominated by credit, and the ability to save through an MFI is often linked to customers’ willingness to borrow from it. Of 166 MFIs surveyed in 2009 by the Microfinance Information Exchange, a think-tank, all offered credit but only 27% offered savings products. Advocates of a greater variety of financial services for the poor argue for more balance.
This may be on the horizon. More MFIs are becoming interested in the potential of savings, thanks partly to the global financial crisis. A majority of more than 400 MFI managers surveyed last March by the Consultative Group to Assist the Poor (CGAP), a microfinance group based at the World Bank, said that they had faced liquidity problems during the crisis (see chart). This, together with rising financing costs and exchange-rate fluctuations for those MFIs that rely on external finance, has prompted many “credit-only” MFIs to warm to the idea of funding at least part of their lending activity using local savings. ...