Bank in the distant pre-pandemic memory, e-MFP launched the European Microfinance Award (EMA) 2020 on Encouraging Effective & Inclusive Savings. While clearly an important topic, with innovations across the sector that are ripe for exposure and commendation, little did we know just how relevant a topic it would turn out to be.
Many months later, the sector has suffered – and continues to reel from – challenges on multiple fronts: to clients, financial services providers, investors, support providers and others, all trying to mitigate losses and preserve the important gains made over recent decades.
Among the clearest lessons revealed by this difficult year is that the mobilisation of savings among vulnerable populations – ensuring access to secure, demand-driven, purpose-matched, flexible and effective savings products and services, that are based on the “mental models” that drive savings behaviour – is crucial to household resilience in the face of immense financial and economic challenges. This is abundantly clear even just from the unprecedented response to the EMA 2020, with its record number and diversity of applicants and savings initiatives (now in the final stages of evaluation before a Selection Committee and then a High Jury, with the winner to be announced on November 19).
“Save money – and money will save you”, goes a Jamaican proverb. How true. It’s also intuitive. We all have a basic understanding of what are savings or the act of saving – “savings as a verb,” as Stuart Rutherford memorably puts it. You hold back some of what you earn, sacrificing immediate pleasures or other opportunities for some future benefit. This benefit can vary from coping with unplanned shocks that can throw one’s life into disarray to more highly planned savings for predictable future events.
Why savings matter to clients…
There is a growing body of research on the benefits of savings to clients, providers and society at large. Probably most significant of these is the array of benefits that savings bring to clients. Among them are:
– Cash-flow smoothing: Variations in income and expenses can be one of the heaviest burdens of poverty. Easily accessible savings are the most affordable and suitable means of managing these ups and downs, as well as preparing for the proverbial “rainy day.”
– Long-term planning: Savings are a perfect fit for most lifecycle events – from birth to schooling to marriage and child-rearing – whose cost and time of arrival is often known well in advance.
– Gender empowerment: Microfinance and women’s empowerment have been inextricably linked from the start, but few products generate the depth of impact for women that savings does.
– Savings for equity creation: Whether the goal is to buy land or invest in a moveable asset, savings are an effective way to increase a household’s net worth and improve its financial well-being.
– Productive investment: While credit is a key product for business investment, savings can be cheaper, less risky and equally effective – especially for smaller and less time-sensitive investments.
– Formalisation: Savings can be an important entry point to formal financial services, building a client’s transaction history and creating opportunities such as access to low-cost credit.
– Safety and convenience: Besides the usual risks (such as theft and fire), cash at home is subject to “leakage,” whether to help out a neighbour or succumbing to an impulse purchase. The use of formal savings helps avoid this tendency – an effect seen among people of all income levels.
…to MFIs…
Savings mobilisation offers an opportunity for providers to develop new relationships with clients. Providers that offer meaningful savings services to a broad client base can sustain growth and innovation for longer periods because of the higher stability of deposits, increased customer loyalty, increased opportunities to cross-sell products like credit and linkage of institutional growth to clients’ preferences and regional economic trends. Savings also offers financial stability. Diversifying into local-currency deposits can reduce dependence on foreign funding and reduce the risks stemming from exogenous financial and political events.
…and to communities
Savings accrue significant benefits to communities and societies as a whole. A savings culture is part of the development of an “ownership society,” in which citizens acquire wealth, build assets and have a personal stake in the prosperity of their environment. This is complemented with private-sector growth, cost reductions, increased efficiencies, job creation and expansion of the role of the financial inclusion sector beyond just financial services.
Saving can also improve health outcomes, enabling timely medical treatment in communities where state-provided health care is limited or nonexistent. Similarly, the empowerment of women through financial autonomy has benefits that radiate beyond the individual. And households that are able to save for later in life place fewer burdens on the state, freeing funding for projects that benefit society as a whole.
The “mental models” behind savings
So what makes people choose to save? Financial decisions are affected by a multitude of variables: long-term calculations, risk avoidance, gut instinct, habits, social pressures, and a host of misaligned incentives and misperceptions. Put together, these variables commonly lead to savings practices that are inconsistent with the traditional economic view of people as rational actors.
The EMA 2020 has revealed that people employ various mental models to help them save better. One common practice is using different jars for different savings purposes. ROSCAs encourage saving by creating an obligation to one’s peers. Another common practice is giving cash to a neighbour to safeguard – not because the neighbour’s house is more secure, but because cash that is out of the house cannot be spent as easily.
Insights into these mental models are being uncovered increasingly by the relatively young field of behavioural economics, which often counters the idea of humans as rational economic actors. Instead, according to Nobel Laureate Richard Thaler, significant biases and cognitive limitations are “human traits that systematically influence individual decisions and market outcomes,” including savings choices.
Encouraging Effective & Inclusive Savings – and the EMA 2020
To highlight these emerging efforts, the organizers of the EMA 2020 invited applications from organisations that are innovating in the encouragement and delivery of savings for low-income and excluded populations. Three components of this topic distinguish exceptional initiatives.
First, financial and non-financial institutions can encourage savings by lowering barriers (making savings accounts or savings groups easier to open or join). But access alone is insufficient. Just as important is for institutions to show that their savings programme is built with an understanding of clients’ behaviour – to take advantage of incentives, group coordination and teachable moments to promote the choice to save.
Second, savings are effective when they are well matched to clients’ specific goals and needs; affordable; accessible; secure; easy to understand; and – wherever possible – taking advantage of technological innovations on the client and institution sides to expand outreach, lower costs and improve service quality. These products also are sustainable for the institution, exhibit high levels of transparency, promote client-provider trust and enjoy genuine client usage (rather than, for example, prioritising the opening of many new accounts that end up dormant).
Third, savings are inclusive when they reach un(der)banked segments, such as women and youth, protecting those most vulnerable to shocks within a comprehensive client protection framework. Holding poor clients’ savings carries a moral as well as a financial responsibility – not only to safeguard the money but to do so affordably and with high levels of transparency.
Over the course of the EMA 2020 application process, it became clear that applicants’ responses to the COVID-19 crisis would become increasingly important in their savings initiatives, institutional resilience, and protection of clients and staff. So we added to the questions asked of applicants – to go beyond those on outreach, scale, target populations and product usage – to explore how the crisis has affected their application. This has been a big ask of organisations already straining under the pressure of crisis management, and we acknowledge and appreciate their patience and efforts.
So, where do things stand now? The first round of the European Microfinance Award 2020 on Encouraging Effective & Inclusive Savings received a record number and range of applicants – 70 applications from 37 countries. And for the first time, every applicant invited to proceed to the second round this year – 38 out of 38 – completed this more comprehensive application form.
The EMA Preselection Committee then evaluated these 38 against a comprehensive set of criteria, and 19 were forwarded to the Selection Committee. This smaller group of applicants is extremely innovative, comprehensive, imaginative and diverse. The programmes are based in 17 different countries, spanning all of the main regions of the world. They comprise 10 microfinance banks, three NBFIs, two cooperatives/credit unions, two fintechs and two NGOs. They offer children’s accounts; commitment savings; doorstep “susu” collection models; financial education and literacy support; digital solutions; group and individual models; and models for many target markets – farmers as well as urban workers, employees as well as microentrepreneurs, business products as well as personal accounts; and many more.
The universe of inclusive savings is vast and growing. The applicants for this award – and especially the 10 semi-finalists that will be profiled in the e-MFP Award publication to be launched during European Microfinance Week – embody the rich array of approaches to encouraging effective and inclusive savings among the people who most need increased resilience during crises like this one.
We look forward to announcing the semi-finalists, subsequently the three finalists and ultimately the winner of this year’s Award. We have learned a lot, and we’re grateful to everyone who has taken part in the Award process. This topic was interesting and valuable nine months ago, but now it is more important than ever.
Sam Mendelson is a Financial Inclusion Specialist at e-MFP and part of its European Microfinance Award team.
This feature is part of a sponsored series on European Microfinance Week, which will take place online from November 16 through November 20. This event is held annually by the European Microfinance Platform (e-MFP), a Luxembourg-based network with approximately 130 members. MicroCapital has been engaged to cover the event on-site each year since 2012.
Courtesy by: https://www.microcapital.org/