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close this bookFinancial Systems for Rural Development (GRET)
close this folderPart three: Synthesis of thematic debates
View the document1. How can the different financial systems be linked together?
View the document2. Durability of Financial Institutions
View the document4. The issue of guarantees and the role played by groups
View the document5. Should credit be granted to all social categories?
View the document6. Must savings come before credit or not?

6. Must savings come before credit or not?

The role of a financial system is to be the go between the agents who can finance and those who need financing. One person's savings is therefore another's credit. But when should savings begin?

Before granting credit (payment of small amounts over a few weeks ); 2) at the same time as the credit Ipayment of a fee and withdrawal of a percentage on the credit that feeds a guarantee fund - 5% for the Grameen Bank); 3) or later when there is already a certain amount of trust?

For some, the issue of starting a savings scheme prior to credit depends on the type of the institution. As a result, a bank could allow itself to start by granting credit whereas a cooperative has to collect resources first, before being able to offer credit.

The different economic contexts in a country and the myriad of reasons for savings (security, setting up a savings as a precautionary measure, future plans for a costly investment such as housing, access to credit, etc.) can explain various approaches in the field.

Savings before or during credit

The arguments in favor of prior savings are partially those put forward by the COOPECs. Setting up a savings account contributes to the durability of the financial structure in terms of independence and autonomy with respect to outside financing.

Prior savings, and this is the theory of "hot money", from the beneficiaries of the local unions (in comparison with "cold money" that comes from outside sources) allows the farmers to develop the feeling of appropriation of the structures, encourages the farmers' interest in the management of the funds and consolidates the solidarity between the members. The management of THEIR money is at issue. Moreover, savings can be a teacher, teaching forecasting and planning.

Lastly, for a bank, if the COOPEC system is backed by the banking system, prior savings is a proof of seriousness and motivation that reassures it.

Prior savings can be voluntary or compulsory. It will be voluntary if the target population is well off enough and has sufficient means for investing part of its assets. If the structure wants equity but the population is not used to saving, it can count on either fees, or on a percentage of the amount of credit. Compulsory savings can be accepted if it is clearly explained.

However, saving requires more rigor than granting credit, especially for voluntary savings. It requires an irreproachable accounting system, a system of monitoring the funds to avoid misuse, training and awareness of the savers, a more sophisticated management, and therefore, extra cost.

Savings after credit

Good intentions are not enough. It is not always easy to collect savings.

- In the event that the financial profitability, for the saver, is lower than the economic profitability, it is not logical to impose savings since the families can use this money in a more profitable way by investing it.

- Studies made by the GRET in Cambodia show that the economic profitability rate of the activities financed by credit is at about 100%, for loan periods ranging from 6 to 12 months. It is therefore in the farmer's best interest to go into debt to develop an activity rather than invest his surplus in a system that, at best, can offer him a remuneration of about 2%/month. Hence the preference for investment over savings.

- Collection of free savings becomes justified insofar as it concerns surplus resources, often from savings hoarded in gold or in cash and therefore potentially not used on a short- or midterm basis. In this case, conditions of trust should be created so that the depositors accept to transform it into the national currency and deposit it in the credit unions. These savings should, at the very least, be remunerated at the rate of inflation.

- As far as savings is concerned, experimenting and progressivity are most often required. Experimenting makes it possible to identify savings habits, reasons that will encourage people to save, and based on this information, thought can be given to the appropriate forms of collecting savings and the financial products to be offered. Progressivity is made necessary by the importance of the trust factor in everything that is related to savings.