One puzzling paradox of microfinance is that lending to the poor has been more successful than helping the poor save more.
The success of those who lend to the poor is indeed praiseworthy, but financial inclusion should also take into account the savings needs of the poor. There is no doubt that the poor squirrel away part of their incomes, as was chronicled in a recent book, Portfolios of the Poor, that showed how even people living a hand-to-mouth existence build a financial buffer for the future. The problem is that the poor do not have access to modern financial services and hence prefer to save in illiquid physical assets such as gold or cattle.
In a deal that could prove to be significant, the Bill and Melinda Gates Foundation has this week given $38 million in grants to 18 microfinanciers who seek to help the poor to save. One explicit goal of this grant is to help lenders use technology such as mobile phones to service the poor.
This is the right way to go forward. One impediment for financial institutions that want to encourage low-ticket deposit accounts is the high transaction costs involved, be it the cost of setting up a bank branch or paying employees to deal with accounts where cash balances are often in the hundreds of rupees. Mobile phones and other technology fixes are one obvious solution.
Indian policymakers have in recent years been trying to get more citizens into the formal financial sector, whether through encouragement of no-frills accounts, routing payments for work done under the National Rural Employment Guarantee Scheme through banks or gradually raising the value limits on banking transactions done via mobile phones.
Yet, an estimated four out of every 10 adult Indians do not have a bank account, in a country that has more cellphones than bank accounts. We had earlier noted in these columns that it is good that the Reserve Bank of India is more focused on financial inclusion rather than chasing dreams about bank mergers.
People use the financial sector to smoothen their cash flows, either by withdrawing savings or taking loans. The microfinance industry has till now focused more sharply on the latter. It is time it gave more thought to microsavings as well.
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