A Spotlight on Effective and Inclusive Savings
“Save money – and money will save you” goes a Jamaican proverb. Variations of this adage exist in countless languages, lauding preparedness, prudence and forethought when managing one’s finances. But the notion goes even further than money. Benjamin Franklin said as much – “By failing to prepare, you are preparing to fail.” It is probably one of the few genuinely universal life tenets.
It’s also intuitive. We all have a basic understanding of what savings – or the act of saving – are. You hold back some of what you earn, sacrificing immediate pleasures or opportunities for some future benefit. This benefit can vary from coping with the unknown and unplanned shocks that can throw one’s life into disarray, to more highly planned savings for high-cost but predictable future expenses – a wedding, pregnancy, a deposit for a house, or retirement.
Extending these benefits to more of the people who need them most is the topic of the European Microfinance Award 2020 – “Encouraging Effective & Inclusive Savings” – which is now open for applications until April 15. In over 10 editions to date, the €100,000 award has sought to shine the spotlight on organisations innovating in a particular area of inclusive finance. It’s open to providers of all categories and sizes that have demonstrated excellence, creativity and rigour in their initiatives for the vulnerable and financially excluded.
Why Savings Matters
This year, savings will be in that spotlight. There are good reasons for this. For much of the past 40 years, the microfinance sector has focused overwhelmingly on credit, which is easier to offer and more profitable for the provider. More often than not, that results in credit being provided as the default financial product when other options – savings or insurance in particular – are both better suited to the particular needs of the client – and come at both lower cost and lower risk. And even though for microfinance institutions (MFIs), total savings deposits are roughly comparable to loans outstanding, these figures conceal the reality of many dormant accounts among lower-income clients, with most deposits drawn from higher-income individuals. While this provides MFIs with flexible, local-currency funding that’s cheaper than foreign debt, it does not serve the poor or the excluded. The provision of savings as a service to this population is still consigned to a much smaller segment of markets and institutions, and remains a rarity in the global financial inclusion ecosystem overall.
There is a growing amount of research on the benefits of effective and inclusive savings to clients, providers and society at large. Part of this is because of the enormous number of benefits that savings bring to clients – some of which are highlighted below:
Cash-flow smoothing: For the households that comprise the majority of the world’s poor – variations in income and expenses can be one of the heaviest burdens of poverty. Easily accessible savings are the most affordable and suitable means of managing these ups and downs, as well as preparing for the proverbial “rainy day” – without the high cost and risks of emergency credit.
Long-term planning: Savings are a perfect fit for most lifecycle events – from birth to schooling to marriage and child-rearing – whose cost and time of arrival (except maybe the final lifecycle event of death) is known well in advance.
Gender empowerment: Microfinance and women’s empowerment have been inextricably linked from the start, but few products show the depth of impact that savings can have on this area.
Savings as equity creation: Whether the goal is to buy land or invest in an asset, savings are an effective way to increase a household’s net worth and improve its financial well-being.
Productive investment: While credit is a key product for business investments, savings can be cheaper, less risky and equally effective – especially for smaller and less time-sensitive investments.
Formalisation: Savings can be an important entry point to formal financial services, building a client’s transaction history and creating opportunities to access low-cost credit.
Safety and convenience: Besides the usual risks (theft, fire, etc.), cash at home is subject to “leakage,” whether that involves helping out a neighbour or succumbing to a temptation purchase. Saving formally provides motivation to avoid this tendency – an effect seen among all people, everywhere.
How Real People Save
Despite the many benefits, savings don’t just happen naturally. Rather, these financial decisions are affected by long-term planning, gut instinct, habits or social pressures. Put together, these variables create savings practices that aren’t well-aligned with the traditional economic view of people as rational actors – nor are they well-matched to traditional savings products like time deposits and current accounts (also called checking accounts). That’s why providers are designing new approaches geared toward the different “mental models” that people employ to help themselves save better.
The complex mental models that show up in savings practices are starting to be better understood by the relatively young area of behavioural economics. One important response to these models is commitment savings, which leverages people’s existing mental models and demonstrates substantially higher levels of saving. Other practices, such as clearly denoting the purpose of the savings (for example, health expenditures) can also increase saving activity. Even simpler interventions, like regular text message reminders to save, have also proven effective in increasing savings. The goal of all these efforts is to develop savings products and programs that better fit how real people save, rather than blindly following the established practices that financial institutions are used to.
What the 2020 European Microfinance Award is Looking For
To highlight these emerging efforts, the European Microfinance Award 2020 invites applications from organisations and programmes that are innovating in the delivery of savings to low-income and excluded populations. There are three main components to this:
First, financial and non-financial institutions can encourage savings by lowering barriers (making savings accounts/groups easy to open or join.) But access alone is insufficient. It’s just as important for institutions to show that their savings programme is built with a holistic understanding of clients’ behaviour – to take advantage of incentives, group coordination and teachable moments for awareness-building to promote positive savings behaviour.
Second, savings products are effective when they:
- Are well-matched to clients’ specific goals and needs;
- Are affordable, accessible, secure and easy to understand; and
- Take advantage of technological innovations at the client and institution side to expand outreach, lower costs and improve service quality wherever possible.
These products are beneficial for the client and sustainable for the institution, and they’re highly transparent in terms, conditions or fees. They are likely to see genuine client usage – in contrast to, for example, programmes that prioritise the opening of many new accounts that end up dormant.
And third, savings are inclusive when they reach un(der)banked and excluded segments – with a special focus on women and youth. Successful savings programmes ensure the protection of those most vulnerable to shocks, and do so within a comprehensive client protection framework. They recognise that taking poor clients’ savings is a moral as well as a financial responsibility – to not only safeguard their money, but to do so affordably and with high levels of transparency.
Along with the criteria above, the European Microfinance Award 2020 will look for evidence of programmes that promote the development of a “culture” of savings. This concept includes widespread evidence of active usage, high customer value, security and trust, a genuine focus on financial education, and engagement (where relevant) with regulators and policy-makers.
All the details about eligibility and the application and evaluation processes are available in the Application Guidelines, supported by a Concept Note for applicants. Round 1 is now open until April 15, and we at e-MFP can’t wait to receive what will surely be a broad and fascinating range of responses from across the inclusive finance sector.
Image credit: Joe Cummings.