The World needs Savings, not Credit

Savings have been the most trusted and oldest building block of financial management. In earlier societies, the habit to save was instilled from childhood. Women served as stewards of managing household savings. However, the new consumerist culture has encouraged credit over savings and we can see so many families mired in debts. MOIN QAZI argues for reviving the traditional culture of savings to save families from appalling debt traps that are ruining their lives.

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THERE is an old saying about poverty: Give a man a fish, and you feed him for a day; show him how to catch fish, and you feed him for a lifetime. In today's context, one of the most effective tools to fight poverty is not a fishing rod, but a savings account.

Over four decades ago the most popular retail banking product was the Pigmy Deposit or the Daily Deposit Scheme. Housewives would scrape together a few rupees daily to hand it over to a savings collector who would visit their homes. The money was deposited in a bank account that paid interest and was insulated from the daily demands of life.

In this way, the depositors squirrelled away a decent sum by the end of a year. Most of the time it was enough to buy a much-desired home appliance. The simple message was, saving money, even if it was only a few rupees at a time. It was a sure way to build wealth.

Pitfalls of Microcredit 

Later, a very innovative idea — microcredit — was born out of a radical concept: Poor people, when lent small amounts of cash, pay it back in a timely manner. In the meantime, that money could be put to use in ways that would help boost income and ostensibly, raise a family's standard of living.

The world soon witnessed a great global rush, with banks pouring billions into microcredit to help the poor. It was a powerful revolution, but it bypassed the centuries-old idea of wealth creation: Savings, the most trusted and the oldest building block of financial management for all societies.

Importance of the "Piggy Bank"

As impoverished borrowers defaulted on debts at alarming rates and often with fatal consequences, many organisations questioned the power of credit. This led to soul-searching by the industry and the rediscovery of a new radical idea, specifically the realisation that what the people really need — more urgently than business loans —was a safe place to save their money. This is what development expert, Robert Vogel, once famously called the "forgotten half of rural finance." It is now universally acknowledged that the most fundamental instrument of personal finance is the "piggy bank".

Getting into Default

The tide is now turning, sparked in part by microcredit's discredit. We all now know that there may be families who have the intelligence to benefit from loans, but there may be many who can be ruined. When they miss loan payments because a lingering illness keeps them away from their business, they get into a regular default cycle. This soon leads to acute indebtedness and makes life stressful for the entire family.

On the contrary, every family in the world can benefit from the habit of stashing small amounts of cash away. Given the variability of their income, the poor are vulnerable to sickness, death and natural calamities, which can be a drain on finances and may even prevent families from hanging on to accumulated assets, including productive ones.

These shocks can quickly sink families into financial mire. As a result, the poor lead precarious, anxiety-ridden lives with the risks looming much larger than opportunities. The benefits of microcredit are often extolled, but debt remains debt; it always increases the risk and borrowers are sometimes overstretched.

Savings can help people manage such risks conveniently, with a smaller monetary burden. And savings do matter, especially to women.

Credit can be an opportunity and a risk

Credit can be both, an opportunity and a risk for low-income families. Though it is necessary to open the doors of self-reliance, but this can also be a barrier. You can dig yourself into a fair amount of debt, and that prevents you from moving up financially. It may become a deepening hole. Loans can be malignant. Some people just cannot handle debts.

Certain business enterprises are too risky. And there is always the temptation to take these costly loans and scrimp on the necessities of life.

However, in contrast, savings are a vital way for the poor to weather financial shocks and capture income-generating opportunities. Nest eggs increase the capability of the poor to manage cash flow, address the problems of uneven income, reduce the impact of the lean season, become more resilient in the face of shocks, build assets or invest in a family business and, most importantly, become empowered to improve one's status within the households and communities.

Benefits of Savings

Savings involve little risks and not much expertise in financial management. Even in traditional societies, no matter how oppressed women are or the level of their literacy, they are often stewards of the family's savings. Sadly, most people do not put aside enough money. That is because humans suffer from economic myopia: The failure to give adequate weight to future benefits over immediate pleasures.

This is because, the self-discipline required to save is greater and the consequences of failure are worse. The instinct for gratification of immediate pleasures overrides the urge to put money away in a savings account for a rainy day. This is particularly true of men.

An Account for Every Woman

The key to effective financial inclusion is a safe and confidential savings account for every woman. The older ones always advise the younger women to keep a store of value that other family members do not know about.

When there is an emergency, they will understand your wisdom and appreciate you. The poor require little compulsion to save. They simply want a reasonable mechanism to do so and the assurance that they will be able to access the nest egg as per their needs.

Households normally put away money in order to have insurance against emergencies, for religious and social obligations, for investment, for the higher education of their children and for future consumption.

Savings have been the mainstay of the impoverished across the country. In particular, villagers, who cope with a veritably Biblical range of hazards.

Nature delivers snakes, scorpions, malaria, dengue, drought, floods, hurricanes, tuberculosis and pests that ravage crops and animals. Then there are the environmental and vocational risks arising out of changes in market climates.

Families are normally financially prepared for education and marriages, but health emergencies are usually a nasty surprise.

Safety Net 

A safe and smart savings account can transform the lives of people. Accumulation of money also serves as a form of self-insurance and enhances the sense of well-being. They are a gateway to self-employment and job creation. Lower-income families can convert savings into home purchases, education and micro-enterprise. Despite conventional wisdom, the underprivileged actually do save, even if it is just a few rupees each day.

The importance of savings for the poor is also demonstrated by the many ingenious (but often costly) ways they find to put money aside. They use a variety of informal mechanisms like hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors and so on. However, for a variety of reasons, most such mechanisms fail to meet the needs of the poor in a convenient, cost-effective and secure manner.

As a consequence, when poor households are provided a safe, easily accessible opportunity to save, their commitment to saving, and the amounts they manage to put aside, are remarkable.

The fact remains that institutions that promote credit, to the exclusion of savings, place poor clients in bondage. To finance a child's primary school education, clients must take on debt because they are not in a position to save. To deal with a health emergency or family food shortage, to finance weddings, funerals, or social ceremonies, they must keep borrowing, again and again. To acquire essential gadgets, they will need to borrow at prohibitive rates of interest that keep them on the debt treadmill since there is no other option.

Thinking Beyond Microcredit

Financial institutions ought to realise that they owe poor people a safe, flexible entity to save. With credit alone, they cannot free them from the tangled web of poverty. Putting money away is a vital prerequisite for emancipation from poverty. We must think beyond the standard microcredit model.

One of the lessons imbibed during the current pandemic is that there is no substitute for savings, given the fact that most of the people, in rural and urban India, too are surviving on savings during this crisis. Thankfully, this wisdom is now particularly influencing young people.

Earlier the usual refrain was "young people don't save enough." It represented the conventional wisdom about our millennials. This is now changing. This cohort of young people is putting away more funds, though for short-term goals.

Millennials now have a savings discipline that the preceding generations lacked. It is heartening to see people realising the wisdom of putting some cash aside. Stuart Rutherford put it pithily long ago: "The choice to save rather than to consume is the foundation of money management."

(Moin Qazi is a development professional. The views expressed are personal.)