Meeting the Savings Challenge
W
ith his keynote speech, “It’s Time to Meet the Savings Challenge,” Bob Christen, Director of Financial Services for the Poor at the Bill & Melinda Gates Foundation, set the tone for the Microfinance From Below Conference held at The Fletcher School March 26-28, 2009.
Christen opened his remarks by raising an intriguing question: What do the poor want to do with money? He drew attention to the fact that they use money in the same way as everyone else. They want to pay for their children’s education, doctor’s visits, and a roof over their heads. Christen explained, “In just the sort of way that we all need different financial tools to organize the things that are most important to us, poor people also need tools to accomplish the same sorts of things.”
Although finance is integrated in the lives of the middle and upper classes, low income groups often live without access to loans, bank accounts, credit cards, or health insurance. Microfinance attempts to help the poor gain access to formal financial tools.
The importance of this task cannot be emphasized enough. If a poor father needs to take his sick child to a hospital, he may spend 3-4 days arranging for finances by borrowing money, pawning jewelry, etc. Pawning jewelry carries an significant interest rate. Yet, the actual cost of treatment may be far less than the value of items pawned. This scenario happens when poor people do not have access to a liquid savings account.
Banks are not an option for poor people’s savings problems because they do not know how to respond to the poor’s needs. Christen explained that the global average cost for a bank teller to service a client is about one dollar. Poor clients, however, require about two dollars of processing due to their special needs. The high cost negatively affects the banks’ profit margin. Also, banks are often not located close to where the poor live. A simple trip to deposit small sum can take hours—not worth the effort for a busy entrepreneur or farmer.
Much can be achieved for the benefit of poor people by bringing deposit services or savings to their doorsteps. Firstly, such a bank “account” makes it possible for the poor to place money safely and spend it much slower, as compared to squandering it right away for fear of it being stolen. Secondly, since many low-income families have relatives working in towns and sending home money, these deposit services provide a cheap, efficient, and secure means to receive funds.
Two major approaches are currently bringing financial services to where the poor work and live: mobile banking and savings-led groups. Regarding the former, the Gates Foundation is looking into opportunities to establish relationships between banks and retailers. The goal is to offer point-of-service facilities at locations such as post offices, mom-and-pop stores, and other outlets convenient to the poor. Christen stressed, “Although the technology has been around for a long time, the problem is how you use this technology to connect all that’s going on in the village which will allow you to use this kind of service.” The M-PESA scheme in Kenya, where mobile phones are used to conduct business transactions, is a successful example.
In savings-led groups, members save together on a regular basis. Members then borrow from their pooled savings as needed. Christen says, “People can save all the time, borrow when they need to, and pay when they can. Since people know each other, they can be relaxed regarding when people can pay, and they can put appropriate pressure on people when they know they are going to have income.” The local aspect of this model saves on travel time and costs for clients. The community aspect encourages members to save regularly and provides a higher return than a bank would. Most importantly, non-governmental organizations that organize these groups can use the informal settings for channeling social messages about topics like health, environment protection, etc.
Christen concluded his speech by stating that the Gates Foundation is currently expending significant efforts on achieving economies of scale for the above approaches. He hopes to deliver each mechanism to far-off places.
Cybele Cochran F09