"The poor don't just want to save," said the Université Libre de Bruxelles' Loic Sadoulet at a recent conference at IDB headquarters. "They want to save a lot." They prefer saving to credit by far, he explained, and they save for the same reasons we all do. For education, weddings, retirement, lean periods and health or other personal emergencies.
But the poor often don't have access to safe, secure savings institutions. For them, saving is risky. A recent MicroSave survey showed that in Latin America, not only do the poorest savers not earn income on their savings; they actually lose an average of 22 percent of their savings due to the use of informal savings mechanisms. Nevertheless, 100% of the poorest savers surveyed made use of informal savings mechanisms.
But if the poor are losing such a large percentage of their savings in informal mechanisms, why don't they just use formal savings institutions? "Formal savings institutions are often inaccessible to them," said Sadoulet. "Transactions costs tend to be prohibitively high for the poor for a number of reasons, such as geographical distance, inconvenient hours, high minimum balance and deposit size requirements, and complex paperwork, to name a few."
The poor have relatively more access to semiformal savings mechanisms, such as microfinance institutions (MFIs) and credit unions, but they all have a downside that hinders its use. "MFIs tend to be safe, but are relatively inflexible," Sadoulet asserted. "They have regulations that were aimed at traditional formal banks, but have little resonance for the typical MFI."
Credit unions are flexible and safe, he added, but they require heavy infrastructure, including significant management capacity to deal with high numbers of small deposits and heavy regulation. "This has limited their expansion," maintained Sadoulet, "particularly in remote areas."
Informal savings mechanisms are what's left: the most accessible and the riskiest.
"Not only do informal savings mechanisms often offer negative rates of return, they may also be illiquid, subject to theft and inflexible," Sadoulet said. "If the poor store wealth through the accumulation of assets, they're vulnerable to theft and shocks. If they use deposit collectors-who store individual deposits outside the immediate reach of savers-they gain flexibility, but risk safety and high fees. Group-based savings systems-such as a system where group members contribute a regular, fixed amount to a community pot that is later distributed to each member, in turn-are safer and cheaper, but they're not very flexible."
Sadoulet maintained that international financial institutions (IFIs) can help improve the savings landscape for the poor by supporting programs that reduce transactions costs for clients and increase accessibility, incorporate transparency and reduce operational costs, allowing for positive returns.
First of all, proposed Sadoulet, IFIs should focus on supervisory and management capacity building. Then, they should finance the development of new, flexible savings products and service delivery mechanisms. They should then support policy formation and development of the regulatory framework, as well as improving information gathering and dissemination efforts, including the creation of credit bureaus.