Cited: Time
A radical concept began the field of micro-finance about 30 years ago. The idea was that when poor people were lent small sums of money, they would pay it back in a timely manner. This meant that the money could be put to use in ways to help boost income and be able to raise a family standard of living. Now, another radical concept has become known, people need a safe place to save their money instead of business loans. It is called the “forgotten half of rural finance” by the development expert Robert Vogel.
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.
“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.
Oxfam America has been creating savings groups since 2005 in villages in Mali, Cambodia and El Salvador that are essentially going back to the beginning and building new organizations with savings at the center. Each group that is developed has about 20 members, almost all of them are women as is tradition in microfinance. Each member states a small amount of money each week into the account and then from that savings will end out sums to other members who may need a loan. Similar models of this program are in India called tandas and West Africa called tontines.
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My Take: Talking about how other countries are doing this, what about America? Can this kind of financing work in America or not? Has it ever been used in America? As an American, I really do not care how the other countries are doing! I am only worried about my own country and how it affects me. The same is true for most Americans.
Right now, our economy is not in the best shape and everybody is worried. They do not want to hear about how Cambodia or India is making it through a bad economy. Yes, if their economy is worse it may make us feel better; however, it does not change the fact that our economy is bad. America wants to hear how our economy is improving or why it is not.
Americans want to hear that our economy is getting better in jobs will become available again. We need to keep our hopes up so that we can move forward. Without hope, there is no future.
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