Solving the microfinance savings riddle

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.