A Familiar Story
“Driving from the city center toward the less affluence suburbs in almost any developing country, one is struck by the number of unfinished houses. There are houses with four walls but no roof, houses with a roof but no windows, would-be houses that might have an unfinished wall or two, houses with beams sticking out of their roofs, walls that someone started painting but never finished. Yet there are no cement mixers or masons in sight. Most of these houses have not been worked on for months. In some of the newer neighborhoods of Tangiers, Morocco, this is so endemic that the finished and freshly painted houses are the ones that stand out.
If you ask owners why they keep unfinished houses, they generally have a simple answer: This is how they save. The story is familiar. When Abhijit’s [a JPAL co-founder] grandfather earned some extra cash, he would add a room to the house. This is how, one room at a time, more of less, the house where his family still lives was built. Poor people cannot afford a whole room. Abhijit’s family used to have a driver who would occasionally ask for a day’s leave. He would buy a sack of cement, a sack of sand, and a stack of bricks and would take a day off to lay some brick. His house was build over many years, 100 bricks at a time.”
This is not the most attractive savings options. But it has benefits such as preventing savings from being spent on ‘temptation goods.’ Here are some more established alternatives:
rotating savings and credit associations (ROSCAs)
“members meet at regular intervals, and all deposit the same amount of money into a common pot at every meeting. Each time, on a rotating basis, one member gets the whole pot.
its advantages over traditional savings accounts: (1) they don’t have fees, (2) one can make small deposits, and on average can get access to the pot much faster than if one saved the same amount every week, (3) a ROSCA group can be a good place to ask for advice.
if members pool their savings and coordinate their withdrawals and deposits, the total amount in the account will be larger, and the bank will be happy to take it
acquaintances who take care of small sums of money for a little fee, or for free
delegating deposit collection
“Banks could use local shopkeepers to take deposits. As long as the local shopkeeper issues the depositor a receipt for the money that the bank is legally obligated to honor, the depositor is protected. Then it is the bank’s problem to make sure that the shopkeeper doesn’t run away with the saver’s money. If the bank is willing to take that risk–and many banks would be happy to–then why should the regulator care? This realization has been percolating through the system in recent years.”
M-PESA: mobile tech to help (in)formal financial flows (see a video about its story)
M-PESA allows users to deposit money into an account linked to their cell phones and then use the cell phone to send money to other peoples accounts and to make payments.
For example: Someone could deposit cash at one of the many grocery shops that happens to be an M-PESA correspondent. This would credit the person’s M-PESA account. She could then send a text message to someone else, who would be able to present the text message to his local correspondent to get his money. Once he gets the cash, the money would be deducted from her M-PESA account
Savings Interventions through Pro-active Investments
“[a farmer] always made the decision about whether or not to buy fertilizer just after the harvest. If the harvest was sufficient to pay for school fees and provide food for the family, he immediately sold the rest of his crop and used the money to purchase hybrid seeds, and if he had any leftover money, fertilizer. He stored the seeds and the fertilizer until the next planting season. He explained to us that he always bought fertilizer in advance, because he knew that money kept in the house would not be saved: When there is money in the house, things always happen, he said, and the money disappears”
This created incentive for the Savings and Fertilizer Initiative (SAFI) program: “Right after the harvest–when farmers have money in hand–they are given the opportunity to purchase a voucher entitling them to fertilizer at sowing time. ICS Africa, an NGO working in the area, implemented the program. Fertilizer was sold at market price, but an ICS field officer visited the farmers at home to sell the vouchers, and the fertilizer was delivered to their homes when they wanted it. This program increase the fraction of farmers who used fertilizer by at least 50%. To put this in perspective, the effect of this program was greater than the effect of a 50% reduction in the price of fertilizer. As long as it was brought to their door at the right time, farmers were very happy to buy fertilizer.”
Note: The farmers didn’t previously buy fertilizer in advance because shops didn’t have fertilizer at harvest time. Supply was low and unpredictable until right before planting time. This intervention just alleviated this minor bottleneck.
The persisting problem: alternatives to banks are inefficient
“the fact that the poor have to substitute for lack of access to proper bank accounts by adopting complicated and costly alternative strategies to save might also mean that they save less than they would if they had a bank account”
All quotes are from Poor Economics by Abhijit V. Banerjee and Esther Duflo