Break No Promises
Melinda Gates set the microfinance world ablaze last week when she announced the Gates Foundation’s five-year, $500 million Global Savings Fund. It was welcome good news for microfinance after a rough few weeks following the Andhra Pradesh crackdown.
Gates noted that “the poor can and do save … (but) they want to do it safely and efficiently.” She went on to acknowledge the success of M-PESA across Kenya. Yet the middle ground between M-PESA customers and the poor “(burying) their cash in a hole in the ground or (hiding) it under the mattress,” actually contains a great diversity of more sophisticated informal financial tools for saving.
Portfolios of the Poor started making waves in 2009. It harnessed twice-monthly interviews with over 250 households for about a year each to document the use of Rotating Savings and Credit Associations (ROSCAs), ASCAs, and other informal financial mechanisms to smooth out unpredictable income to meet predictable daily needs, insure against risk, and save for major life expenses. In June 2010, a new anthology called Financial Promise for the Poor: How Groups Build Microsavings, appeared on the scene.
Promise’s editors and contributors begin by detailing how such mechanisms are remarkably ubiquitous among the poor, and how they often tap into deep historical and cultural traditions. Whether starting out tied to religious ceremonies in Bali or as an economic response to seasonal income variation in Kenya, Tanzania, northeast India or Nepal, financial mechanisms continue to emerge organically. They start out very small and simple, growing and evolving over time to meet members’ needs. In northeast India, far from any international support for a full-fledged financial sector, a professional class of auditors and banking managers has emerged all on its own. In almost every case, successful group saving and lending takes seriously the role of corporate governance.
With $500 million and marching orders from the Gates Foundation, “banks, microfinance institutions, mobile phone operators, regulators, retailers, and telecom companies,” now venture into a world filled with informal financial mechanisms, many of which are deeply embedded in culture and history. Will these informal mechanisms be brought along in the $500 million march? Or will they be trampled? The anthology addresses these questions by tackling the question of what role outsiders can play in supporting or promoting savings groups.
Pacing is a serious issue; urged on by the need to demonstrate impact, implementers risk pushing groups into more complex activities for which they are not yet prepared. Such was the case for some informal groups among pastoralist communities in Ethiopia. Promise also documents how infusing groups with additional seed capital on top of local savings can lead to financial mismanagement. When they push too hard on the gas pedal with new activities or with additional capital, as some contributors documented, outsiders can undermine savings groups and the communities they intend to support.
Outsiders can trample homegrown financial mechanisms in another way – by crowding them out. New entrants are new competitors; and with $500 million and a world of professional staff to back them up, these entrants may have a significant competitive advantage. As these competitors begin attracting the meager savings of the poor, they might be taking business away from homegrown competitors.
Then again, since any given poor household has “a fistful of financial relationships on the go,” it’s also possible that new competitors are crowding-in local competitors, catalyzing opportunities that would otherwise have never emerged – especially for professional, homegrown auditors and bank managers. The ties of local ownership are strong indeed, as Promise vividly documents; perhaps they are strong enough for homegrown finance to compete and take advantage of crowding-in effects.
There is a dearth of research on whether or not promoted savings and lending mechanisms are taking business away or adding to the business of homegrown savings groups. Promise does not contain robust data on this issue, but it does raise the question. As Gates Foundation implementers begin their $500 million march, crowding out/in effects should be of great interest for monitoring and evaluation. In the meantime, however, there are ways to increase the likelihood that new saving mechanisms are crowding-in homegrown competitors rather than crowding them out.
First among ways to promote crowding-in is having patience; appropriate pacing and consideration for local capacity must temper the urge to demonstrate impact. Building that local capacity will surely be a part of this story. Second is making sure that financial regulations are clear, up to date, and transparently enforced – on that front, the Gates Foundation is indeed ahead of the curve, having published a paper about it in August 2010. With effective financial sector regulation, investors of every kind, not just the Gates Foundation kind, can potentially invest in homegrown competitors themselves rather than starting from scratch. That would be the difference between fulfilling financial promise for the poor, and breaking it.