The potential for domestic savings

by Farhana Haque Rahman

There is nothing new in the awareness that the world, especially the developing world, is facing a food crisis of major proportions that will only get worse unless massive, thoughtful action is taken. There is widespread agreement that developing countries must somehow become more agriculturally self-sufficient and economically independent than they have been in the past, that they must generate greater internal resources for financing current needs and future development. What is relatively new, however, is the mounting recognition of the important role that domestic savings, and in particular rural savings, can and should play in the economic future of developing countries.

"Personal savings-given an increase in their volume, a change in their structure and an improvement in their allocation to productive investments-appear to offer a solution to the crisis that will facilitate harmonious longterm growth." These comments were made in the summary report of preparatory meeting of experts for the third United Nations International Symposium on "Mobilization of Personal Savings in Developing Countries" held in Yaounde, Cameroon in December, 1984. The report added: "If development is based to the maximum extent on domestic resources, it is possible to finance growth that is less dependent on external resources, less inflationary and more regular."

Until recently, most domestic savings programmes and planning for coordinated savings mobilization have concentrated on the urban, industrial sector; the rural market has generally been ignored. Yet if only in terms of sheer numbers of rural population in developing countries and the obvious need to channel more funds into agricultural development, an effective mobilization of rural savings assumes a high priority. Perhaps, as Auguste Daubrey claims, it is even a "necessity".

The benefits of an effective rural savings programme are clear. At the individual family level savings generate capital that can be used to maintain or improve productivity through purchase of seeds, stock, fertilizer, insecticides, or tools, to cover expenses for weddings, births, and funerals, or to provide a cushion against hard times or emergencies. They give a farmer a measure of independence and control he would otherwise not have. At a wider group or community level, it would allow this same self-determination, an increased ability to finance broad-scale agricultural improvements appropriate to local needs and conditions. At a larger, integrated level, it could play an important role in the national economy by helping to increase agricultural production and by enabling the agricultural sector to become more self-financing.

The relative neglect of rural savings has numerous causes, some obvious, some less so, some deriving from experience, some from long-held assumptions. One of the problems has been that accurate information on the rural financial market in most developing countries has been scarce at best, reflecting the nature of the "penny market" and the belief that it was too insignificant to warrant careful study. In all developing countries a great deal of rural financial activity is conducted not through established banking institutions but through an amorphous network of "informal" institutions whose transactions involve small sums among a frequently thinly dispersed population. Record keeping is uneven at best, often non-existent. Analysis and assessment, even with the best of intentions, is extremely difficult. Much of the data on national economies lump urban and rural finances together, thus adding to the difficulty. However, this situation is beginning to change as more economists and development planners are turning their attention to the rural financial sector and finding, as the Paris meeting summary states, that "domestic savings do exist on a larger scale than is generally thought, and unused reserves of savings exist as well.... Furthermore, the developing countries do have untapped savings potential."

The "penny market". Still, there are factors which would seem to militate against the idea that the "penny market" could ever really play anything but the minor role it has traditionally been thought to play in national economies-a tiny fraction of the total value of agricultural output, a small percentage of total savings and credit funds. One basic assumption about savings in developing countries is that despite the enormous populations involved, most of the people are simply too poor to save even if they wanted to. A second assumption is that "it is impossible to affect either the volume or the structure of personal savings (and) even if this did appear possible, the cost of such a policy would be prohibitive." While both of these assumptions are founded on fact, there is good evidence that neither need be as decisive as has been supposed. Experience in a number of countries in Africa, Asia, and Latin America has shown that given the right conditions poor farmers can and will save, and that broad scale programmes can be economically feasible.

Behind these two assumptions lie a series of facts which undoubtedly do interfere with significant saving habits among the rural poor. In many cultures custom and tradition, as well as the lack of education and the pressures of day-to-day survival, inhibit an interest in saving. In many areas farmers save, if they save at all, in kind not specie-livestock, foodstuffs, jewellery, etc. There is the often irresistible temptation, as income grows, to increase immediate consumption rather than to save for an indefinite tomorrow. There is a not uncommon distrust of "official" institutions like banks, a fear of inflation and taxation which would make deposits unsafe" or decrease in value, given what are frequently very low interest rates. There is the fact, notably in much of Africa and Latin America, of a rural population so widely scattered in isolated areas that providing saving facilities is a major problem, a problem compounded for nomadic pastoralists. A further complication, at least for developing a coordinated national savings system, is the existence of' informal" institutional arrangements operating in the rural financial market, for these compete, directly or indirectly, with whatever formal institutions may be present or which may be introduced. Finally, there is the complex problem of rural credit and its possible negative effects on saving. Where interest rates on rural loans are deliberately set low to make borrowing more attractive and available, the incentive to save may be dulled, while interest rates on saving deposits may also be set commensurately low, thus making saving less attractive.

Can rural savings ever make a significant contribution to the national economies of developing countries? There is growing evidence that, given the right conditions, it can. For example. Alexander Muser, in his study of savings programmes in 15 Asian, African, and Latin American countries describes 25 such programmes which he feels are successful in varying degrees.12 In another study Sung-Hoon Kim finds that in all of the 11 Asian countries he surveyed-Bangladesh, India, Indonesia, China, Republic of Korea, Malaysia, Nepal, Pakistan, the Philippines, Sri Lanka, and Thailand-the same is true, and all have significant potential for further savings mobilization.13 He notes that over the past few years there has been a steady increase of between 9 and 25 per cent in savings in money over savings in kind in every country, with a faster rate of increase in rural than in urban savings, especially in South Asia.

All these successful programmes share certain characteristics to varying degrees: (1) regular small deposits by a significant number of participants; (2) the presence of motivated and trained workers who mediate between the people and the financial institution: (3) group self-determination-that is, the freedom of the savers to choose how and when to use their deposit reserves; (4) the effective linkage between the savings institution and local, traditional social and economic patterns; (5) the combination of the savings programme with a credit facility for depositors. The first two characteristics are obvious, though not always easy to establish; the last three perhaps require further explanation.

Hand in hand. It makes sense to discuss rural savings and rural credit together not because in practice they always go hand in hand, but because most students of the economies of developing countries agree that they should. The critical need for extensive and effective agricultural credit in these countries, if there is to be any substantial increase in agricultural production and improvement in the living standards of the rural population, has long been recognized. Small holder farmers-the large majority in most developing countries-simply do not have sufficient surplus capital for significant investments in such basic materials as improved seeds, fertilizers, insecticides, and tools, let alone mechanized equipment or irrigation. Over the past few decades, a number of Third World countries have tried to build systems of rural credit by establishing rural branches of commercial banks, multipurpose development agencies, and the like, as well as by enacting laws favouring, very low interest rates on credit, reserving a certain percentage of loan resources for rural credit, or encouraging the organization of cooperatives. However, most of these programmes have depended on funds provided by the government, urban banks, or foreign donor agencies; very few have drawn on local savings. In general, the results have been unequitable and below expectations. These efforts to extend agricultural loan facilities have encountered a number of problems worth summarizing here. Administrative costs are often prohibitive. Transactions normally involve small amounts, but financial regulations - may dictate the same extensive - paperwork used for large ones, and the need to serve a widely dispersed clientele requires extended facilities and staff costs. A high default rate on loans is common. One of the reasons is that agriculture is particularly subject to unexpected, uncontrollable crises in yields and prices that affect the incomes of a large number of households at once. There is a strong temptation to overextend credit before proper controls and procedures are established.

When cheap credit is offered as an incentive, the results can be negative. The interest charged is insufficient to cover costs, and far too often the cheap loans are concentrated in the hands of a few well-off or experienced borrowers or are available only to those who live near urban or district centres or in already well-developed agricultural areas. In addition, government policies that control lending limits and set strict criteria for credit" worthiness can eliminate those who most need the loans. This monopoly by the few impedes rather than favours broader income distribution, one of the objectives of credit programmes. A further problem is that in programmes created with specific development goals in mind (such as encouraging income-producing crops)? credit funds received may be diverted to other purposes wich have little or nothing to do with the intended use. Too often credit conditions are not dictated by or responsive to local needs; too often credit is too little or too late.

A good case can be made for combining savings and credit. Adams and Vogel are not alone in believing that "institutions that mobilize savings as well as lend are more likely to be viable than intermediaries that only lend."14 Each activity seems to stumulate the other; savings can provide the funds for loans, while there is good evidence that if credit funds are generated by local depositing, the default rate tends to be lower than when these Funds are provided by an "anonymous" source like the government or an urban bank-the power of overt or covert community pressure, the sense of personal responsibility to one's friends and neighbours. ''The volume of resources that can be obtained through effective programmes of savings mobilization and loan recovery is potentially far greater than the most optimistic estimates of the amount of subsidized loans and grants available from governments and donors."

On the other hand, the availability of credit can act as an incentive to save, especially when the savings-and-loan programme is organized around a specific group of people who share the same concerns and who can, in one form or another, pool their resources. This self-help attitude can in turn promote long-term planning and investment on both an individual and community level.

Too often rural financial institutions that give farmers credit are not authorized to accept savings, although this is gradually changing. Mittendorf cites the effective use of cereal banks for savings mobilization in Burkina Faso, the Gambia, Niger, and, more recently, Tanzania, where the Government now permits rural development banks to promote savings schemes. Since the middle of 1984 the Banca Agricola in the Dominican Republic has operated a rural savings mobilization project in nine of its 31 branches; the same project team is helping four credit unions plan a savings programme.16 Too often rural savings, where they do exist in such formal institutions as commercial bank branches or post office saving services, are siphoned off for urban development, one of the reasons why the Banca Agricola project requires that all lending be limited to the area where the savings are deposited.

An effective combination of rural credit and rural savings is one important element in the development of successful agricultural self-financing and improvement. Another is linkage between the formal financial institutions and local, traditional economic and social systems, including the "informal" sector of the rural market. There is mounting evidence that the current role and future potential of this informal network is far greater than was previously supposed. This informal network takes a wide variety of forms depending on the local economic structure and social tradition and may involve a number of different kinds of people. According to Mittendorf, relatives, friends, storekeepers, merchant moneylenders, pawnbrokers, and the like, lend in credit, cash, or kind; trader-lenders play a larger role in Asia than in Africa, where parastatal organization control much of the marketing, thus inhibiting the growth of large-scale operations by local African traders. These lenders normally provide the small farmer with shortterm credit in cash or kind for such basic materials as seeds, fertilizers, and tools.

Many kinds of grass-roots mutual-aid groups or savings clubs exist in the rural areas of developing countries. One type, prevalent throughout Africa, Asia, and Latin America, is the rotating savings and credit association (ROSCA). Although the specific system will vary from society to society, the basic idea is the same: regular contributions to a common fund, which is then given to each individual participant in turn. Somewhat more structured are the savings and lending associations (SLA), where the savings deposits are earmarked for defined investment in, say, seeds, fertilizer, tools, or mechanized equipment. These groups replace, and in some cases compete with, the "formal" financial institutions, like banks, postal savings, and credit unions. In some countries, among them the Republic of Korea, Bangladesh, and Zimbabwe, these mutual-aid groups have formed the basis for significant, large-scale savings and credit organizations which have become part of the formal rural finance system.

Informal sector. The informal sector of the rural market has begun to be the subject of serious attention and study, and although the nature and extent of its role in many countries is still unclear, a number of identifiable characteristics offer valuable guidelines for future rural development. The informal sector is not subject to "outside" regulations on interest rates for deposits or loans, and thus allow "real?" market rates to prevail. Nor is it subject to official regulations on credit allocations, creditworthiness, or liquidation ratios, and thus may be able to serve those who otherwise might be disqualified. It is by nature designed for and accustomed to dealing in the small amounts common in the "penny market"; it uses very simple bookkeeping methods and has low facility and staffing overheads-all of which keep administrative costs low. It tends to be very flexible, and thus can be responsive to local needs and changes in local conditions. Its rules and regulations, based on local customs and traditions, are understood and supported by the participants; it tends, therefore, to enjoy a sense of trust often not accorded to formal, "outside" institutions. The credit default rate is usually far lower than that experienced by formal institutions, undoubtedly because of peer pressure to repay debts and not over-borrow. It is, in sum, economical, adapted to local needs, and available to the poor as well as to the wealthier or more sophisticated farmers.

When these informal institutions take the form of local groups, they can also provide the farmer with a convenient forum for the exchange of ideas and information, a group "self-help" spirit which creates both security and incentive, an opportunity to participate in collective short- and long-term planning, and an enhanced purchasing/ bargaining power through the pooled resources. All of this can lead to a more informed, sustained development. The appropriate goods can be ordered in advance at competitive prices and received when needed, critical in any sector of the economy, but especially vital in agriculture.

There is general agreement that an important dimension in the development of a stable and effective programme of agricultural improvement in the Third World may well depend on a stable and effective system of rural savings, and that this depends on fostering a self-help attitude among the rural poor, combining credit with savings, drawing on the experience of the indigenous informal financial institutions and on some kind of link between these and the formal financial sector. This link does carry with it the risk, as Mittendorf and others have pointed out, of destroying the valuable sense of trust and self-help spirit that are such positive elements of many informal arrangements. However, given incentives, opportunity, and planning, such a link is possible in many forms and can be effective. The People's Bank in Sri Lanka and the Piura Savings Bank in Peru, for example, have become involved in pawnbroking as one means of encouraging savings-in this case by converting holdings in kind into cash. ROSCA, and SLAs may use banks to hold their deposits or help disperse credit as in Nigeria or Cameroon. The Small Farmers Development Projects, launched in 1975 under the auspices of the Agricultural Development Bank of Nepal, had by the middle of 1983 reached 2 000 groups of small farmers, providing savings facilities and credit delivery for 20 000 members.

Small informal savings groups have been organized into credit unions with ties to formal financial institutions in the Philippines, Thailand, and Indonesia. The Credit Union Movement in Lesotho, started in 1961 around local savings groups, mostly women, had 64 established credit unions by 1983, most with at least 50 regular members each; "an apex organization, the Lesotho Cooperative Credit Union League (LCCUL) was founded in 1968," notes Mittendorf, "to provide support and services to affiliated credit unions as well as to provide and expand the movement in other areas of the country." One of the most successful programmes is the Savings Development Movement in Zimbabwe. (See Cerescope, September-October 1982,p.10.) A key to the success of SDM in addition to energetic and effective leadership, is, according to Mittendorf, that the savings/credit system is linked with a "well defined agricultural technical package programme for which the larger part of the savings are used. Each agricultural package programme, well tailored to the requirements of the savers, is oriented to income-generating activities and covers improved farming operations, correct seed and fertilizer inputs, pest control, storage and marketing operations." Regular group meetings allow cooperative advance planning, while the savings provide hard cash; the group can thus order the necessary materials early at competitive prices, getting what they need when they need it. "After the success of this initial phase, the Savings Movement is now giving consideration to the establishement of a savings development bank specifically charged with the duties of providing a repository for club funds of arranging advances to clubs against the security of their deposits, of administering loans in terms of any guarantee grant arrangements and the utilization its profits for further development of the savings movement."

Mobilize idle money. One of the most significant efforts to build a rural savings and credit system in Asia is the Mutual Financing Programme in the Republic of Korea. This cooperative banking facility was started in 1969 and was based partially on the local informal mutual assistance groups, "kye", in which savings and loans in kind were made by wives who contributed a cup of rice a day to a central deposit. The chief purpose of the MFP "is to mobilize idle money in the rural areas for the purpose of meeting member-farmers' needs for farm production and for household expenditure."19 Deposits earn two or three per cent more interest than commercial banks give, an incentive that has contributed to the impressive growth of deposits-63.9 per cent annually (37.5 per cent in real terms) from 1973 to 1982-and a corresponding increase in loans. By 1982, MFP savings deposits constituted 5.1 per cent of the total deposits in all financial institutions in the country. "From 1974 onwards" Kim observes, "the MFP operations were characterized by excess deposits over loans. The MFP has subsequently become a major source of funds of the Korean Government for the purchase of agricultural produce. Thus, instead of the Government financing the farmers, the reverse has become true in the case of the MFP."

A more recent rural self-help project which has received considerable attention is the Grameen Bank of Bangladesh. The project, the brainchild of Prof. Yunus of the University of Chittagong, began in a single village in 1976; by 1983 it had been extended to over 1 200 villages and had over 58 000 participants. The objective of the programme is to generate employment and income for the landless or near-landless rural poor. Four regional offices and over 64 branch offices supervise the formation of the basic units: groups of five people, unrelated, who each make small regular deposits and who in turn withdraw money on loan. More than 430 specially trained and motivated bank workers, who generally come from the region they work in, act as intermediaries between the Bank and the people, and serve as promoters, organizers and advisers. They make weekly visits to each group in the villages, thus implementing the Bank's motto: "Take the bank to the people; not the people to the Bank."

Direct, on-the-spot assistance, advice and control is one feature of the Grameen Bank; another is its system of deposits. There are two types of deposits, the Group Fund, a credit resource, and the Emergency Fund, an insurance reserve against death, default, accidents, etc. These deposits are generated by a combination of the regular contributions of the group members, a 5 per cent "tax" on each loan (the borrower is given = 95 per cent of the total amount), and an "insurance premium" equivalent to 50 per cent of the regular loan interest paid by the borrower.

Until 1983 these funds were held by a commercial bank which acted as an intermediary since; then the project has been formally organized into its own bank. The funds deposited by a group are normally used by individuals on a rotating basis, though joint group loans are possible.

The International Fund for Agricultural Development (IFAD) made an interest-free loan of US$3.4 million for refinancing to the Grameen Bank through the Bangladesh Bank, a sum which the Bangladesh Bank has matched out of its own local currency funds. A savings interest rate of 4.5 per cent is high enough to be attractive, while a lending rate of 16 per cent allows enough margin to cover administrative costs, a rate well below that charged by private lenders (10 per cent per month and even 10 per cent per market day.)

Muser, in his assessment of the Grameen Bank project, comments that "Grameen Bank has found a new and independent way to reach poorer target groups and motivate them to help themselves. This self-help is reflected in savings schemes, group liability, insurance against risk and productive employment to generate income for themselves. "He notes that careful control has prevented credit funds from being taken over by better-off, more sophisticated borrowers, and that average income of group members has increased by about 70 per cent after two or three years. He cites four basic reason for the success of the Bank: a sound concept which combines local groups and trained advisers preserves a large measure of local autonomy and responsibility, and links "regular savings, regular group meetings and transparent and tightly orgenized mechanisms for the award and repayment of loans;" the effective use of trained workers who go directly to the target groups; the energy and vision of the founders, Dr. Yunus; and the cooperation of the Government of Bangladesh in providing "indirect subsidies in the form of favourable interest rates to the Grameen Bank ".Programmes such as the Grameen Bank, the Mutual Financing Programme in Korea, and the Savings Development Movement in Zimbabwe can help make the agricultural sector more self-financing and productive and the distribution of income more equitable, through the geration of local funds tied to an effective credit system. Appropriate facilities, advice and incentives can create a pattern of regular savings among the enormous population of the poor. Careful planning and suitable links between formal financial institutions and the traditional systems operating in the informal "penny market" can result in services that are economical to administer, fruitful in their allocation of resources, and available to those who need them most. Sensitivity to local customs and needs can preserve and encourage a vital self-help attitude, a sense of personal and community hope as they invest in their own future.

Although mobilization of rural savings cannot in itself solve the world food crisis or the financial problems facing many developing countries, it can make a significant contribution to national and individual prosperity, or, even more fundamental, to national and individual survival.