Microsavings from an insurance perspective

It is clear from both qualitative and quantitative studies that poor people use microsavings to reduce vulnerability, smooth consumption and reduce the likelihood of having to make asset sales under duress. It is also clear that the microsavings of the poor are held predominantly in the informal sector.

The formal sector banks, MFIs, cooperatives, postal savings banks and others—have only a limited capacity to meet the savings needs of the poor. However, microsavings are only one component of the portfolios that poor people seek to develop to cope with the uncertainties of their lives.

Each of these different instruments offer different mixes of advantages and disadvantages for those who use them, particularly in terms of accessibility, security, and the types of shock or stress they can help deal with (Table 2 above).

Detailed interviews with households in poor communities16 reveal that poor people, like most better-off people, do not seek to identify a single optimal insurance instrument to deal with their multiple vulnerabilities.

Rather, they develop portfolios that utilise a range of different instruments in order to have the flexibility to deal with many different types and scale of hazard, and they attempt to diversify these portfolios so that they are not excessively dependent on any single instrument or institution or individual.

Qualitative research shows that microsavings can be used to manage potential and actual shocks and stresses both ex ante and ex post, along with other forms of insurance and insurance surrogates.

Yet, as discussed in Part A, an overwhelming body of quantitative and qualitative evidence reveals that access to formal microsavings services is very low for poor people (and for many near poor and non-poor people) in developing countries.

Increasing poor people’s access to microsavings services thus has to be an essential element of any strategy to reduce their vulnerability.

While theoreticians may strive to specify optimal instruments, in practical terms this means making secure microsavings services more accessible for poor people in rural and urban areas so that they have greater choice.

Before examining the shortcomings of present-day formal microsavings we should recall some of their advantages.

They can be used to deal with many different types of hazard or stress both ex ante and ex post. This is an advantage over many forms of insurance which only cover a specific type of shock.
Their use can usually be sanctioned by the saver and does not require application to insurance agents who will determine whether or not a claim is valid.
Microsavings are a means of further diversifying a household’s insurance portfolio and this helps to further spread risk.

The main shortcomings of microsavings may be summarised as follows:

First, for the vast majority of people in developing countries, formal microsavings services are not available. The main reasons for this are lack of proximity, the high costs of access to such services, and the organisational cultures of formal institutions (whose procedures and staff attitudes often deter poor people).
In cases were such services have been provided, their role as an insurance device has sometimes been weakened by product design features that reduce accessibility. An outstanding example comes from Bangladesh where the Grameen Bank, BRAC and other agencies used client savings as a form of quasi-collateral.17 As a result, clients were only permitted to access their savings if they repaid their loans and left the MFI. Rather than supporting clients in times of need, these agencies added to their insecurity.
Third, where services are available, many poor people do not use formal microsaving services because of doubts about the security of such institutions. In countries where retail banks have gone bust, such as Uganda, faith in the formal system takes several years to recover.
Fourth, even when formal microsaving services are available and used by poor people, the level of savings households can amass is only sufficient to help prevent or cope with or recover from small shocks. Major shocks—chronic illness, disablement, loss of employment, loss of main assets—need to be covered by other instruments such as risk-pooling insurance or social protection.

How might such shortcomings, especially the first three listed above,18 be overcome? Recent work by CGAP (2006) reviewing evidence from Benin, Bosnia, Mexico, the Philippines and Uganda attempted to identify the policies and actions that are required to expand formal microsavings services and permit them to compete with the informal sector.

These can be summarised as: improving coverage and proximity; making savings services more affordable/less costly; strengthening the security of savings services (both in real terms and in terms of public perceptions); and, making formal institutions more user-friendly to poor people.

1. Improving proximity

Being distant from financial institutions and/or having to spend a lot of time getting to an institution is a problem for poor people in most parts of the world and particularly in rural areas (where access might require several hours or even days travel).

Clearly there is no blanket prescription for how to improve proximity—answers need to be country and context specific. However, some strategic directions can be identified as follows.

a) Existing organisations must be encouraged to improve their outreach. In many circumstances this may mean a focus on cooperatives, rural banking structures and postal savings banks. The classic example of a vast increase in outreach is BRI in Indonesia. In the 1980s the deregulation of financial services created the opportunity for BRI to develop user-friendly microsavings products and within months the number and volume of savings accounts rose dramatically (Robinson 2002). The SANASA cooperatives in Sri Lanka had a similar ‘leap’ in coverage following their ‘re-awakening’ by a visionary leader and social activist (Montgomery, Hulme and Bhattacharya 1996).

(b) Policy-makers should look for means to encourage centralised financial institutions, such as urban-based ‘big banks’, to reach down for new clients while MFIs and social entrepreneurs are encouraged to experiment with new forms of savings service at the grass-roots level. This may involve new forms of partnership, such as the relationships between commercial banks, NGOs and self-help groups (SHGs) in India, and new forms of operation, such as SafeSave’s fieldworkers visiting clients at their home or workplace on a one-to-one basis each day (Hulme and Moore 2007a).

(c) Support for innovative programmes that use new technologies (mobile phones, smart cards and identification technologies) to provide microsavings services at locations that are most convenient for clients (see CGAP 2006: 11).

2. Making savings services more affordable/less costly for poor people

Getting services geographically closer to poor people reduces their transaction costs and makes it easier for them to make deposits or withdrawals. But other reforms can deepen this impact.

In particular, designing services so that they have low threshold costs for establishing a savings account only small opening fees, low minimum balances or share costs (for cooperatives) is likely to encourage savers to join formal institutions.

Lowering these threshold costs can be compensated by the organisation increasing its post-joining charges.

Again, SANASA in Sri Lanka illustrates how this might work. In the 1980s it encouraged primary cooperatives to allow lowincome households to purchase their mandatory ‘share’ by instalments, rather than as an up-front lump sum.

This led to a large expansion in the number of microsavers, which expanded the resources that cooperatives had available to on lend to established clients.

3. Improving the security of microsavings in the formal sector19

This is a difficult issue for both analysis and action. Research indicates that savers place security at the top of their priorities. At the same time, they place their savings with informal deposit-takers whose reliability is lower than that of alternative institutions.

This may be because of a lack of information and perceptions (or rather misperceptions) about the degree of influence or control they have over informal providers.

Once ‘security’ becomes a policy issue there is a danger of politicians and bureaucrats having a knee-jerk reaction pronouncing that “…we must regulate all savings institutions so that microsavings are totally secure.”

Unfortunately, such a response is likely to create a set of incentives for the formal financial sector that will mean avoiding microsavings.

Wright and Mutesasira’s (2002) finding that relatively unsupervised formal deposit taking institutions are less risky than informal providers should caution policymakers against pursuing regulatory ‘counsels of perfection’ that will discourage formal sector agencies from entering the microsavings market and reduce the competition that might lead to microsavers’ needs being more adequately addressed.

4. Organisational culture, staff attitudes and user friendliness

The beliefs, attitudes and behaviours of formal finance institutions and their staff can be a major obstacle to their providing microsavings services to poorer people.

Personal experience from fieldwork in Bangladesh and India over the years (Hulme) has revealed that public and private banks often demand high levels of client literacy (in regions where illiteracy is common), make poor people feel unwelcome and permit their ‘frontline’ staff (tellers and junior advisers) to behave in a discriminatory way to women, lower castes and/or tribal peoples and religious minorities.

Promoting internal policies and practices more attuned to the idea of financial inclusion (as a component of social inclusion) would help to remove such barriers. Steps in this direction include simplifying forms and procedures and language, providing oral advice to illiterate clients, and stamping out discrimination.

Location: Indonesia