The moral of Ligua’s story, told to a nonprofit group working with her bank, seems simple enough: Saving money, even if it’s only pennies at a time, is a guaranteed way to build wealth. But that idea is upending decades of popular wisdom about poverty and the best way to eradicate it.
The “microsavings” concept is taking root in developing countries where nonprofit groups and financial institutions in the past preached that credit was the key to attaining a better life. But as impoverished borrowers began defaulting on debts at alarming rates in recent years — sometimes with fatal consequences — many organizations began questioning the power of credit. That led to some industry soul-searching and to the rediscovery of perhaps the most basic and universal instrument of personal finance: the piggy bank.
“There’s a common, misguided, knee-jerk reaction that if you’re poor, you have no assets to save,” said Dean Karlan, a Yale economist who runs the nonprofit Innovations for Poverty Action. “People who are poor obviously save less, but they still save.”
Microsavings programs include informal savings circles in Africa and mobile-phone deposits in India. The field has attracted $500 million in grants from The Bill and Melinda Gates Foundation. Many institutions that were making microloans are now adding microsavings to their offerings; some have stopped lending money.
Still, the sector is just a sliver of the size of microcredit (a.k.a. microlending). Growth will hinge on making the case for companies to invest in a business model with uncertain returns and high costs. It will need technological advances that allow financial institutions and their customers to access and move money quickly. And it will require building the trust of the poor, penny by penny.
“I think everybody thought this stuff is just gonna take off like wildfire,” said Kim Wilson, who lectures on microfinance at the Fletcher School at Tufts University. “It’s slow. It requires a lot of investment in time.”
Going up or down
The essential question facing the poor, as Karlan’s group describes it, is whether to save up or save down.
Saving down is a way to describe credit: The lump sum comes at the start and is slowly whittled down. Saving down is expensive because borrowers have to pay interest on those loans. But they can reap the benefits of the money immediately and put off the financial obligations until later.
Microlending’s founding father, Muhammad Yunus, hoped to create a virtuous circle that eventually would lift borrowers out of poverty. He began by lending his own money to help Bangladeshi women buy bamboo so they could make furniture to sell. His interest rate was lower than the local moneylender, but Yunus realized that if he made enough of the loans, he could run a profitable business while helping the poor. His work earned him a Nobel Peace Prize in 2006 as microlending blossomed around the globe.