Micro-Savings

Micro-credit is under siege.  The rise of “loan shark” banks bites at social enterprises’ reputation. Muhammad Yunus, the Godfather of micro-finance, first provided small loans to fix the void filled by exploitative lenders with exorbitant interest rates; not to reward these institutions with a shared public profile.  Unfortunately, all banks that provide small loans are clumped together as “Micro-Credit.”  

The failure of many of these predatory programs is also attributed to lackadaisical banking practices.  Banks now lend to individuals instead of issuing group loans that utilize social capital (ie peer pressure) and time investment as collateral.  As bankers all know, to ensure repayment borrowers need some form of collateral (physical or social).  Providing small loans but inadequate services should not warrant the “micro-finance” classification for irresponsible banks.

Micro-savings, for instance, add a dimension to micro-finance that commercial banks gloss over.  Classes accustomed to living paycheck to paycheck lack a culture of saving.  They are unfamiliar with the benefits of savings or with wealth accumulation techniques.  Often times, new income is spent quickly without regard.  A PhD student once described to me his dissertation, in which a poor Peruvian sold his small land to a gold mining company, only to blow off his $1M proceeds within the year.

New fruit-stand in Mercado Camacho
La Paz, Bolivia

To supplement loan divisions, micro-savings programs exist to assist the working poor plan for the future.  Traditional micro-finance banks increase repayment rates by combining loans with coaching.  Bank representatives personally give strategy seminars in asset building and jointly help establish savings plans with customers.  Adhering to the Grameen Bank school of thought, micro-savings programs combine teaching with banking.  The poor learn how to create material wealth and increase capital assets.

Micro-credit’s founder, Muhammad Yunus, never claimed to rid the world of poverty.  Poverty alleviation is just an ancillary benefit of providing loans to the penniless.  The goal has always been to integrate the lowest classes into a financial system that traditionally deemed them too poor to qualify.  Micro-credit’s first step gave the poor access to loans.  Micro-savings is the natural progression, providing those with low incomes a basic knowledge of money management.

Micro-Savings