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close this bookQuelle politique d'épargne dans les systèmes d'épargne-crédit ? Au Cambodge et au Viet-nam, GRET, 1996
close this folderWhere does saving fit into micro-finance systems?
close this folderPart two: The question of savings in micro-finance systems
View the document(introduction)
View the documentI - Objective parameters
View the documentII - Key parameters
View the documentIII - Mechanisms for mobilising savings

II - Key parameters

" Confidence

Without question, the key factor in any financial operation is confidence.

In order to function, financial networks must establish confidence. Self-interest can never suffice to found durable financial relationships. Jean-Michel Servet, in "la confiance, un facteur décisif de la mobilisation de l'épargne" (published by Aupelf-Uref), illustrates this phenomenon very clearly by relating the following anecdote: «A quarter of a century ago, a French bank had launched a publicity campaign using the slogan «votre argent m'interésse» (km interested in your money), thereby breaking this implicit moral pact and adopting a position strictly limited to reciprocal self-interest. This campaign, which moreover denied the role of money as a social link and addressed an isolated client-individual, was hastily withdrawn from the walls of French towns and cities, as in many places passers-by had distorted the posters, by adding vampire's teeth to the banker's broadly smiling face. Today, publicity agents extol the virtues of a given product or a service by claiming that «entre nous», ce n'est pas seulement une question d'argent» (between us, it's not just a question of money).

Confidence also has a spatial dimension. One of the reasons for the success of M-F systems is to be found in their proximity. One is more likely to have confidence in the savings-credit system if it has taken the form of a village level scheme run by a villager in charge. ''if financial operations and institutions are seen as a strange world, in other words a strangers' world, few savers will come forward to deposit their savings in them".

Confidence is also the confidence that one has in the individuals who are in contact with the clients. Plainly, if the representatives of the scheme are chosen by the members themselves, there will be a greater sense of security in going to deposit one's money with it.

Jean-Michel Servet also clearly shows the importance of cultural proximity between the financial institution and its clientele: "One must also distinguish between internal confidence and external confidence. These two types of confidence can in fact be contradictory. To access external capital funds, external confidence has to be mobilised, i.e. that of funding bodies who have an image - including an aesthetic one - of what a financial institution should be Thus financial establishments in Africa are, in their architecture, their furniture, the dress of a large proportion of their managers and their staff etc., models of dissemination of so-called Western culture and in consequence of cultural mismatch. To gain internal financial confidence on the other hand, i.e. that of popular national savings, establishments of a type which do not jar against local cultures need to be developed. What we have here is a kind of squaring of the circle which can only be resolved by setting up financial networks which are diversified, specialised and linked amongst themselves".

Some people find having a link with a financial institution off-putting. As was in fact the case in Europe for a long time, they prefer to keep their money in their own hands, rather than to have recourse to a bank, an impersonal structure. In savings-credit systems, cases of members who a short time after making a deposit with the village scheme - sometimes only a few hours later return to withdraw the same amount on the pretext of a sudden need are often cited. In fact, they are putting the savings scheme to the test, and the scheme has to prove to them that it is taking good care of their money and that they can come and withdraw it whenever they like. This is an important factor with regard to the role of savings in M-F systems. They must be in a position to cope at any moment.

" Families' overall saving capacity

Demand for credit can be high, whereas overall savings capacity may be low. This is even more the case if fragile families, with very small amounts of capital, are being targeted.

This is the case in Cambodia, where studies carried out amongst a sample of 200 peasant families give an indication of the levels of savings hoarded up (see "étude d'impact micro-economique", Nathalie Gauthier, Pascal Bousso, Gret, Cambodia, 19951.

N.B.: most savings in Cambodia are found in the form of gold:

- 75% of families have no savings in gold;
- 20% of families have savings of between 0 and 250 USD;
- 3% of families have savings in excess of 250 USD.

The low level of domestic savings does not prevent the mobilisation of savings amongst the clientele of M-F systems, but it most often requires having recourse to compulsory savings, a kind of regular levy made on the client. The Grameen Bank has demonstrated that in these conditions it was possible to mobilise several million US dollars.

" Inflation

Inflation has different effects, depending on the circumstances. In itself, it does not prevent savings from being mobilised. We will even see that under certain conditions savings can be mobilised in a situation of hyper-inflation. But nothing sustainable can be done in an unstable monetary context.

How can inflation influence technical choices relating to savings? At least three possibilities can be distinguished:

" There is sometimes an alternative to hoarding in fiduciary currency. This is the case in Cambodia, where the riel can be converted into gold, including in the countryside. The capital thus transformed into a fail-safe asset is protected from the devaluation of the riel. The savings scheme thus plays no part here in protecting the value of capital and it is difficult to mobilise savings.

" When there is no such alternative, the savings-credit scheme must be able to fulfil this function of protecting the value of capital against inflation. If inflation is high but regular, the scheme should be able to fix - in the medium term its nominal rates in the light of the inflation. In this case, mobilising savings is uncertain, but possible.

" When prices rises occur in sudden stages, with unpredictable fluctuations, this is more delicate. In Zaire, in a situation of hyper-inflation, with no possible recourse to a safe scriptural asset, only a system of variable rates indexed monthly to the rate of inflation enables the effect of fluctuations to be attenuated 1. In this case, paradoxically, inflation can then make depositing money with the scheme look attractive.

1Savings credit project implemented by Gret in Western Kasaï:

" Savings yield

We have seen that choosing to place savings with M-F systems has only rarely to do with the financial gains procured by the deposit. On the other hand, choosing not to save can be explained by preferring investment at the expense of placing money on deposit.

This is because if the performance of investments is superior to that of the deposit, economic agents naturally prefer to make their capital grow through investment. We will return to this at greater length in the final part of this document.

" The micro-finance institution's financial policy

As an M-F systems develops, there is generally an attempt to gradually reduce the proportion of external funding in favour of the resources mobilised or created by the credit structure. The nature and the origin of these resources must be clearly distinguished:

" The clientele's deposits (voluntary or compulsory) represent savings; they are the savings-credit system's own resources, but not their own funds.

" The various compulsory direct contributions (membership fees, levies on loans, group reserve funds, contingency fund, etc.); to the extent that these cannot be recovered by the contributors, these can be regarded as the credit structure's own funds.

" Capital donations or reserves built up by results yielding a surplus; these are also the savings-credit structure's own funds. Allocating results yielding a surplus to the structure's own funds is of course equivalent to making a form of levy on the borrowers through interest rates. In the final resort, they are in fact indirect contributions. These are probably more painless psychologically and less cumbersome in administrative terms than compulsory direct contributions.

M-F systems generally seek to diversify their resources: clients! deposits (savings), loans from the banking sector or from international funding bodies (refinancing), their own funds. Central banks can direct these diversification efforts by setting ratios.

Main advantages and disavantages of savings in micro-finance systems



At credit sheme level

Enables the money to be heated up.

If not all members save, the «heating up» effect remains limited.

Increases resources.

Plays a teaching role: money does not come solely from outside.

At household level

May be cost-effective.

May immobilise resources which would be more cost-effective if invested.

May avoid falls in value of capital due to inflation. May meet a security need (against risks of theft, etc.).

May exclude certain families if saving dictates access to credit.

May help families get used to saving.

At credit agent level

May make recovery easier.

Increases the agent's work-load.

Reduces credit scheme/agent cover.

At micro-finance system level

Enables resources to be mobilised.

Generally results in an on-cost which has to be absorbed by the loan interest rate.

Strengthens autonomy vis-à-vis funders.

Diversifies where resources originate.

Should enable the system to be sustainable.

At macro-economic level

Can help to reinforce global investment capacity.

Can help to limit the inflationary effect of externally provided resources.

In order to achieve the gradual reduction of the proportion of external financing in favour of the structure's own resources, several strategies can therefore be devised, depending on how easy it is to mobilise savings, depending on the level of interest rates, depending on the rates of refinancing, etc.

For example, if interest rates are fixed in a directive manner and turn out to be too low (as in Vietnam), attempts might to be made to compensate for a low financial margin by levying direct contributions (membership fees, a group tax...).

When it is difficult to mobilise savings (as in Cambodia), there will be more focus on generating the structure's own funds through indirect and/or direct levies. Conversely, when it is easy to mobilise savings, generating the structure's own funds will be less crucial.

Finally, the financial policy is shaped by comparative cost analysis: if the intermediation policy (based on mobilising savings) is more costly than a policy of refinancing from another financial institution, the M-F systems will have no objective advantage in favouring savings. On the contrary, it will seek to restrict its volume in order to limit its cost, whilst tending to have increasing recourse to external loans.

There is no universal rule on financial policy, only case by case tailor-made solutions.