The Problem of Mandatory Formalization in Financial Inclusion
Saving up can be very powerful – there is liberation in the process of saving (“I can control my impulses and plan for the future”) and freedom in choosing outcomes enabled by savings (“I can buy that car”). In a 2014 review paper, I argued for the need for improved savings tools, even for small bits of savings, and the need to understand accumulated savings as the cheapest source of capital in many development settings.
To my great joy, the second Birdsall conference hosted by the Center for Global Development (CGD) in Washington, D.C., on Nov. 2 and 3 highlighted this message loud and clear. The Revisiting What Works: Women, Economic Empowerment and Smart Design report authored by Mayra Buvinic (CGD and UN Foundation) and Megan O’Donnell (CGD) revisits 136 empirical evaluations surveyed three years ago, as well as a fresh set of 96 evaluations completed since then, and provides an assessment of the effectiveness of various tested interventions to improve women’s economic empowerment outcomes. Savings emerges as one of the interventions with a “proven” rating for all types of women (across their constructed categories of very poor, poor, non-poor and young), with a qualification that for very poor rural women, savings as part of bundled services are likely to be more effective.
Despite my wholehearted support for this assessment, I left the event with two nagging worries. The first had to do with the heavy focus on savings provision through formal financial service providers, and the second on bank savings accounts becoming the new lone wolf in financial inclusion discussion circles.
One of the more interesting trends in the cross-country panel datasets we collect at Women for Women International has to do with the distinction between reported saving behavior and reported use of various savings tools among our women program participants. In two of our country programs – Nigeria and Rwanda – we open bank/credit union accounts for all women program participants, into which their monthly stipends are directly deposited. Simultaneously, across all of our six active country programs in conflict-affected settings, women are encouraged to start a habit of saving over the course of their year-long interaction with us, either with the stipend they receive in cash, or with the digital transfer of their stipend into their newly opened bank accounts, or using their own earnings.
Globally, participants who report saving a portion of their personal earnings (including their stipend) moves from 19 percent at enrollment, to 82 percent at graduation from our program after a year, to 91 percent two years after leaving the program in a follow-up survey. The number reporting saving in cash moves from 9 percent to 28 percent to 44 percent at these same points in time. Participation in savings cycles/groups moves from 12 percent to 47 percent to 69 percent. And yet, use of the bank/credit union account to save goes from <1 percent to 30 percent to <1 percent. This pattern holds even in Nigeria and Rwanda, where we open bank accounts for all our women program participants. So women start actively saving through their participation in our year-long program, and continue their savings practice well after our program concludes, but through non-bank channels that seem to work better for them in their environments.
While the CGD event began with a powerful discussion of self-employment, organizing informal labor markets, and deeply understanding the realities and constraints of poor women, the nearly exclusive focus on bank-based approaches in the financial inclusion session seemed discouraging. Formal financial inclusion at what cost, and for what benefit? Are we starting to hang all savings interventions on the peg of formal bank (or mobile money) savings accounts?
This nagging worry was compounded by the remarkable announcement by the government of India on Nov. 8 that it would scrap the value of 500 and 1000 rupee currency notes overnight and demand that all such demonetized notes be exchanged at bank branches over the next 50 days. In a country where 57 percent of women do not have a bank account, how exactly is the government of India and the banking sector planning to ensure no losses to the value of each woman citizen’s precious savings stock? This strategy is purportedly intended to sniff out untaxed income (a largely political task that could have well been pursued through targeted attacks on powerful high-income tax evaders). But is it simultaneously going to wash away years of accumulation and carefully cultivated strategies to save among women savers, who have been stashing away small bits of their household earnings privately, often secretly, for contributions to chit funds, self-help groups, pawn shops? Is this what the savings imperative is now becoming – formal savings or nothing?
The bank account is a tool – for safekeeping, earmarking, transacting – but those functionalities can also be provided by other non-bank tools. An opened bank account in and of itself means very little (see this Financial Inclusion Insights blog post discussing the feeble differences in development outcomes despite the big push for bank account expansion in India since 2014). A high bank balance in that account also, in and of itself, means very little for the individual saver. With the paltry interest offered, we do not expect our bank savings accounts to grow in a way that overcomes the losses to inflation. A sitting balance in a bank account is literally a waste of money for the consumer doing the saving. What does have meaning is what that accumulation lets you buy or borrow at a lower cost at the right time, without having to beg, borrow (at high cost) or steal. And when that investment or asset grows in a meaningful way, generating positive net returns, then we have something to write home about: development and wealth accumulation in action. The reverse process, exemplified by the housing market crash of 2008 in the United States, is development undone despite all the sophistication of the U.S. formal financial system.
Economic well-being seems to be a continuous dance between liquidity and illiquidity, flows and stock, risk and return, investment and consumption, today and tomorrow. The bank account is a step, but what makes saving “empowering” on a personal level is my ability to leverage that savings accumulation to borrow at low cost on top of my savings balance to buy a home or a college education, or spend it when my child has an accident and needs an operation on short notice in the middle of the night (for which cash still is queen), or have it stay out of sight as a loan to my sister and come back to me as my retirement income stream. Help me save, give me compelling choices to grow my savings, but how I conduct my everyday saving is ultimately my call.
While we use this logic to govern our financial lives in high-income settings, we seem to stop short when it comes to areas in poverty. This holistic vision of financial lives and investments cannot be set aside just because formal bank accounts are easier to track and therefore easier to study and measure. The act of saving is and should be widespread, with us as development actors making an effort to track, aggregate and safeguard the majority of savings activities and tools used by the poor often in the informal and semiformal sectors. The products of saving can and should be widespread, from land, to goats, to roofs, to secondary school textbooks, to medicines, to inventory, to jewelry. We should take our cue from the low usage rates of bank accounts among the poor, pay attention to saving as a process in all its forms, and measure asset and capital accumulation as the relevant outcomes in all their forms – human, physical, financial, social and political. I struggle with the immensity of this task every day in my job, but there is no easy way around what is needed. The full scope of women’s expanded choices and empowerment through the right mix of formal, semiformal and informal tools for spending, saving, borrowing and insuring will possibly then come into view.
Photo courtesy of Women for Women International/Alison Wright