Module 5: Microsavings

The book Portfolios of the Poor incorporates a household survey called the Financial Diaries, which tracked how money was managed in 285 households across India, Bangladesh, and South Africa. The result demonstrated that the BoP saves consistently over time. On average, a surprisingly high %age—a quarter of monthly income—is devoted to savings.(1) Money was managed through informal, semi-formal, and formal services, with every household using at least 4 services, and a tenth using more than even 10 services.(2) Both formal and informal savings devices have advantages and disadvantages. Formal savings devices are more reliable, but often lack convenience or efficacy. On the other hand, informal savings devices are ubiquitous but are often inflexible, unreliable, and only useful for short-term savings.(3)

If a hypothetical individual in the BoP were to make an average of US$2 a day, it is not the same as what usually happens in the developed world, where that income would be a consistent US$2 every day. Instead, 58 % of respondents surveyed in the Financial Diaries had significant variations in income, ranging easily from negative amounts to high amounts.(4) This fluctuation in income makes it imperative for the poor to know how to manage money in times of higher income so that they have some leftover for other times.(5) Poverty should be considered as a socioeconomic status over time;(6) therefore, the ability of savings institutes to raise socioeconomic status long-term has a large potential to effect change on the BoP.
In addition to low incomes and the unpredictability of incomes, the BoP also suffers from a lack of appropriate financial tools. Consequently, the savings of most individuals are used up within a year. This is certainly an area where outside organizations can have a role, providing sound financial advice and tools to allow the BoP to maximize their savings and manage their money long-term. After all, the financial goals of low-income families are similar to better-off households, especially for acquiring a home and paying for important events, such as weddings, funerals, or holidays.

Case Study: the MatchSavings.org Program

The MatchSavings.org program solicits online donations to match the first savings accounts of the rural poor with the idea of attracting them to save money for the first time in a formalized institution. A number of potential uses of this program were identified. Many orphans have difficulty becoming adopted because their need to pay school fees and other expenses are considered to be a financial burden to their adoptive families. Starting a savings fund with some of the older orphans would allow them to have the financial resources for their own schooling. Furthermore, although the poor save, many do so in the form of physical assets rather than financial, and the financial assets they do have are in invested in informal institutions, which are often more familiar and available to the common villager. The matched savings program is used as an incentive to attract villagers to regulated institutions, where they receive more reliable services, more investing options, and access to trained personnel. (7)

MatchSavings also seeks to encourage deliberate planning alongside a savings account. Starting an account requires clients to set a specific 6-month savings goal with a trained MatchSavings employee. Some of these goals include improving housing, expanding enterprises and microbusiness, and investing in healthcare, education, and training. Furthermore, life insurance is also provided as part of the savings plan, especially useful given that more than half of poor families depend on a single wage earner.(8).(9)

From 2008 to 2009, MatchSavings conducted their first pilot project in Mexico involving 120 individuals to evaluate whether their model would work. The saved money was spent in the following ways: 64 % in housing, 26 % in microfinancing, 7 % in education, and 3 % in health. One of the most promising outcomes was that 117 participants continued to save after the completion of the program, suggesting that the MatchSavings program instilled a behavioral change in the participants.(10) Ultimately, the largest impact a microsavings firm can have is to turn a consumption culture into a savings culture.(11)

Criticisms of the MatchSavings Program

Whereas the MatchSavings Program appears to hold some potential for lasting change, there are also a number of concerns that have been identified. First of all, there are questions about the scalability of the project, particularly about the feasibility of sending MatchSavings employees to over 1000 clients to set individual savings goals. Furthermore, their claim of continued savings patterns among the participants is ambiguous and needs to be more specifically defined.(12)

Equally important is the issue of sustainability. For MatchSavings to function long term, it cannot solely function by matching donor funds to savings accounts. For banks to work, they need sources of income, which come from taking loans, especially on major purchases such as houses or automobiles. The aspect of relying on donor funds requires a constant search for more money from more donors.(13) This approach contrasts with the Kiva loans program, which solicits online donations by advertising on their website about the types of projects that are funded by their microfinance institution partners. Kiva subsequently functions as a credit program, putting a condition on their loans that they are repaid by the microfinance institutions within a specific time frame. Once the loan is repaid, the online donor can choose to donate to fund another project, meaning that the money is continually recycled and theoretically very few new donors need to be recruited once a certain threshold has been reached.(14) With respect to the MatchSavings program, one has to wonder whether donor funds will eventually dry up and whether this will reduce the ability to attract new clients.(15)

Admittedly, Matchsavings (savings) and Kiva (credit) programs have distinctions from each other, with credit programs containing decidedly more emphasis on financing entrepreneurial projects. Savings programs ideally should have more flexibility than credit programs. In the Matchsavings program, spending on education, training, and healthcare are certainly important aspects of spending that are often not included in business-building initiatives. Given the unpredictability of the developing world, the BoP needs this flexibility to deal with unexpected problems; indeed, much of their money is already tied up, and the inflexibility of their medium-term, year-long savings is their greatest financial vulnerability.(16) More can be done to modify the MatchSavings program for increased flexibility, although some of that might come at a cost of sacrificing the commitment device that ostensibly acts as a savings motivator.(17)    

The final criticism of the MatchSavings program is to question whether it is necessary. Much of the BoP already saves; in fact, in central Africa, they already save 25 % of their earnings, which is more than the amount Americans save.(18) Whether a matched savings program is even necessary as an incentive is thus questionable, and recent studies have shown that the poor will accept negative interest rates for the sake of storing their money safely.(19) Furthermore, the success of the pilot project might be confounded by a selection bias since part of the condition for starting a loan was to have a savings goal. Overall, it would seem as though the need for increased savings might be secondary to better cash management,(20) which might still be addressed by the formalized MatchSavings financial institution, but would be a separate focus from their current mission statement.

Conclusions

The MatchSavings.org program has the potential to provide villagers with a novel flexible, medium-term savings resource. Although the idea of matching savings may not be necessary, it may act as an impetus to create a stronger savings culture. If such a culture is established, a matched savings incentive may become completely superfluous. MatchSavings.org could shift its focus to providing financial advice and tools, perhaps providing some credit as well.

Footnotes

(1)Collins, D.L. and Morduch, J. “Banking Low-Income Populations: Perspectives from South Africa.” Access, Assets and Poverty Conference. Barr, M. and Blank, R. (Eds.) 2007. Georgetown University, Washington, DC. p. 1-31. Accessed June 28, 2010.

(2) Collins, D.L., Morduch, J., Rutherford, S. and Ruthven, O. Portfolios of the Poor: How the World’s Poor Live on $2 a Day. 2009. Princeton, NJ: Princeton University Press. 

(3) Ibid.

(4) Collins, D.L. and Morduch, J., 2007.

(5) Collins, D.L. et al., 2009.

(6) Von Pischke. “Savings as a Tool for International Development: Spotlight on WOCCU’s MatchSavings.org Program.”  Global Assets Project Panel Discussion. 2009. Washington, DC, New America Foundation. Accessed June 24, 2010.

(7) Branch, B. “Savings as a Tool for International Development: Spotlight on WOCCU’s MatchSavings.org Program.”  Global Assets Project Panel Discussion. 2009. Washington, DC, New America Foundation. Accessed June 24, 2010.

(8) Collins, D.L. and Leibbrandt, M. “The Financial Impact of HIV/AIDS on Poor Households in South Africa.” AIDS. 21.suppl 7 (2007): S76-S81. Accessed June 27, 2010.

(9) Branch, B. “Savings as a Tool for International Development: Spotlight on WOCCU’s MatchSavings.org Program.”  Global Assets Project Panel Discussion. 2009. Washington, DC, New America Foundation. Accessed June 24, 2010.

(10) Ibid.

(11) Kristof, K.D. “Moonshine or the Kids?” 22 May 2010. The New York Times. Accessed July 7, 2010.

(12) Stark, E. “Savings as a Tool for International Development: Spotlight on WOCCU’s MatchSavings.org Program.”  Global Assets Project Panel Discussion. 2009. Washington, DC, New America Foundation. Accessed June 24, 2010.

(13) Ibid.

(14) Kiva. “How Kiva Works.” Kiva. 2010. Accessed June 30, 2010.

(15) Collins, D.L. “Savings as a Tool for International Development: Spotlight on WOCCU’s MatchSavings.org Program.”  Global Assets Project Panel Discussion. 2009. Washington, DC, New America Foundation. Accessed June 24, 2010.

(16) Ibid.

(17) Ibid.

(18) Ibid.

(19) Wyeth, N. “Report from the Mobile Money Summit: State of the Industry.” NextBillion : Development Through Expertise. 2010. Accessed on June 28, 2010.

(20) Collins, D.L., 2009.