It’s Microsaving That Matters, Not Microcredit

The beginning of this pieces is a little elision around a political point. Yunus and Grameen are not flavour of the month in current Bangladeshi political circles. A certain amount of boots biggism perhaps. But after the talking down of microcredit from the PM there’s an important point to get over:

But what is the specific thing that micro-credit experimentation taught us? The poor might like a bit of credit, and they’ll benefit a bit perhaps. But what they really want is a method of micro-saving. That is, the benefit of micro-banking isn’t being able to borrow small sums of money. It’s being able to save small sums for those inevitable crises that arrive.

Think this through for a moment. The poor are, largely enough, the rural labourers, small farmers perhaps. Income is seasonal, tied to the crop cycle. So, there are times when there is some money, times when there isn’t. Saving is a way of smoothing consumption over variable earnings, as Milton Friedman told us. Therefore, the poor need a method of saving.

But, they’re poor. They don’t have much money. Therefore, it’s not worth it for traditional banking to cater to their needs. However many farm labourers you’ve got using it, you’re not going to cover the overheads of a bank branch. Which leaves them with what choices?

Paper money can be stolen, and the rats can — often enough will — eat it. And if the neighbours know that there’s actually money around, how difficult will it be to preserve those savings if someone asks for some help? Which is, of course, the reason why there’s so much gold jewellery out there in the hinterlands — it can easily be sold or pawned when necessary. The family’s gold, even if it be just an earring or two, is the family’s savings account.

All of which is what led to the surprising finding about various electronic methods of banking such as M-Pesa in East Africa. Yes, having a payment system was useful and used. That it was possible to transfer money, simply, and cheaply, was indeed that boon. The various micro-credit schemes were thought to be useful. And the thing that people really stampeded to use was the ability to save — quickly and cheaply.

And why wouldn’t this be true? We richer people all engage in income smoothing – hmm, perhaps consumption smoothing over a variable income. We’re all also human (well, except for Simon Cowell, obvs) so why wouldn’t that behaviour appeal to the poor as well?

Which is the lesson for poor places finance. It’s the ability to save that people want. Those that provide it will make out like bandits.

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Yorkshire Bank started out as the Penny Savings Bank. You could open an account with 1/240th of a pound.