Solving the microfinance savings riddle


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A few months ago I discussed the release of the World Bank publication on Bringing Finance to Pakistan's Poor. One of the authors' key findings was that most Pakistanis have a strong aversion to debt, and are seeking financial channels to store their savings, rather than for borrowing. According to their survey data, most Pakistanis are more interested in accessing savings accounts than loans.

Might the same be true with respect to microfinance? Up until now, the microfinance industry has focused its energies on making microloans rather than creating microsavings accounts.

The Gates Foundation is looking to shake things up:

For decades, the microfinance industry has really been about microcredit — making tiny loans to shoestring entrepreneurs in poor countries. Taking deposits and creating savings accounts for the poor has gotten short shrift.

The reasons were straightforward: funding for loans often came from international donors, and collecting small deposits seemed to be an inefficient headache for the microfinance bankers.

The Bill and Melinda Gates Foundation is hoping to change that with $38 million in grants announced on Wednesday for 18 microfinance institutions. The goal is to spur the building of efficient models and systems for small savings accounts. The foundation hopes to reach 11 million people across a dozen nations in Africa, Asia and Latin America over the next five years.

The main barriers to establishing microsavings accounts involve transaction costs. According to Bob Christen, the Gates Foundation's director of financial services for the poor, the cost of processing a cash transaction by a bank teller averages around $1 in developing countries. For transactions under $100 (which presumably includes most microsavings transactions), banks take a loss.

Rather than raise funds through deposits, microfinance institutions simply rely on donors. Much of the Gates Foundation money will be dedicated to improving technology (mobile phones, smart cards) to lower these transaction costs.

If successful, these efforts will not only diversify and augment funding sources for microfinance loans, they will offer a crucial service to savers who are looking to move their money from under the mattress and into the formal banking system.

Join the Conversation

Asif Dowla
January 13, 2010

You said "Up until now, the microfinance industry has focused its energies on making microloans rather than creating microsavings accounts."


"Rather than raise funds through deposits, microfinance institutions simply rely on donors."

Not true, exactly.

Grameen Bank has developed numerous savings programs for its borrowers. The bank has more in savings than in credit so much so that most of its new branches are self sufficient on day one. Granted, GB is exceptional--it has the legal right to collect savings from members and non-members alike.

The main hurdle is absence of legal framework.

Manasee Desai
January 28, 2010

I do not entirely agree with the idea that the main barriers to micro-savings products in the past have been transaction costs and funder preferences, nor that the practice of micro-savings is entirely new. Along the lines of Asif's comment, SEWA Bank in Ahmedabad, India has been around since the early 1970s and has offered savings accounts since its inception, with a diverse array of specialized savings accounts offered in the years since. SEWA's mobile bank tellers collect savings deposits by going door to door within their own neighborhoods, just as they do to collect loan repayments, keeping transaction costs low for both types of financial services.

More pointedly, Jonathan Morduch's recent framing note "Borrowing to Save: Perspectives from Portfolios of the Poor" (, outlines case studies where clients exhibit a demand for savings products, but in some cases prefer to employ the repayment discipline required of borrowing in lieu of free form savings. Although savings can be seen as borrowing in reverse (but without a fee), the cases outline reasons why re-building savings for the poor can be more difficult than making payments toward a loan. Therefore, some borrowers actually prefer to finance their expenses by paying a high interest rate to borrow rather than to save for free.

Isaac Akinfala
January 17, 2011

I agreed that in some cases, the poor are looking for where they can save their money rather than keeeping them under their pillows.Unfortunately, this cannot be generalise across the globe. Nigeria experience in microfinancing has shown that more than 80% of the poor that have relationship with bank are actually looking for loans.In a situation where deposits are not available it is difficult therefore to meet the loan demand of the people. Surprisingly, the local MFBs are finding it difficult to access funds from international donors.While MFB should design products that are target at mobilise savings,International donors should pay attention to the what is happening in the Nigeria microfinance sector with a view to given them the opportunity to access cheap funds for operations.