The relative risks to the savings of poor people
Small Enterprise Development
Executive Summary Background: Increasingly MicroFinance Institutions (MFIs) have come to recognise the need to provide savings services -both as a much valued service to their clients, and as a long-term source of capital. This has lead to growing interest in savings, Vogel's (1984) "forgotten half" of microfinance. As a result of the new attention to savings services, a great deal of time and energy is being spent by Central Banks, donors, consultants and MFIs on developing systems for
... ng and supervising MFIs offering savings services. Central Banks' motivation to regulate MFIs (or indeed any other financial institution) typically revolve round two primary aims: 1. to protect the integrity of the country's financial system (i.e. to guard against "systemic risk"), and 2. to protect depositors within a context of asymmetric distribution of information (i.e. to guard against depositors losing their savings in the event of the failure of financial institutions). In most countries, (with the exceptions of Indonesia, Bangladesh and possibly Bolivia) MFIs simply have not reached the scale or achieved the breadth and depth of market penetration to pose any systemic risk. It is therefore the laudable desire of Central Banks to "protect depositors" that is the credible rationale for their efforts to regulate and supervise. Poor people have limited access to formal or semi-formal financial services (indeed this is the basic rationale for the development of the microfinance industry). Poor people therefore lack formal financial service alternatives to the MFIs. If MFIs are prohibited from offering savings services to poor people, those poor people are forced to resort to the informal sector in order to save. It is clear, and now generally accepted, that poor people want, need and do indeed save. There is also increasing evidence that poor people are facing an extremely risky environment when they save in the informal sector. Thus it is clear that when discussing the risk to poor people's savings, this has to been evaluated on a relative basis. Very often all the alternative savings systems available to poor people are risky ... thus poor people are left facing decisions on the relative risk (or relative security/safety) of the various semi-and informal savings systems open to them. Research Objective: The primary objective of the survey was to quantify the relative risk faced by poor people as they save in the formal, semi-formal and informal sectors. More specifically the following questions were addressed: 1. What formal, semi-formal and informal savings systems/services the poor use (if any)? 2. How much money have the poor saved in various systems in the past one-year? 3. How much money have they lost within the one-year period in the various systems? Methodology: MicroSave used its existing extensive qualitative data set (comprising over 500 group interviews [with groups averaging 6-8 people] and another 200 plus individual in-depth interviews) and complemented these with an additional 19 focus group discussions and participatory rapid appraisal exercises explicitly designed for this study. This qualitative work was complemented by a quantitative component. A private sector Market Research company, Research International was hired to carry out the quantitative component of the study, which was based on 1,500 face-to-face interviews among adults in Central, Eastern and Western Uganda. 2 Weakness of Data: As with all quantitative surveys involving financial affairs, the data has to be treated with some care and concern. For a variety of reasons people under or overstate financial transactions -in this case savings or losses. In other cases, as a result of the very nature of the savings systems used (particularly those with ongoing arrangements such as functioning burial funds or Accumulating Savings and Credit Associations or Savings and Credit Co-operatives) it was difficult for respondents to know if they had lost savings and particularly to estimate exactly how much they had really lost. Finally, when discussing savings, it is always important to differentiate "stocks" of savings (savings as a noun -the balance/amount of savings in a account/system) from "flows" of savings (saving as a verb -the process of saving to create the stocks). This survey sought to focus on the process of saving -i.e. the amounts the people saved in the various systems as opposed to the stocks of savings held there. Despite this, there is a risk that some respondents were discussing their stocks of savings in the various systems. To mitigate these factors and to bring a depth of understanding to the issues we relied on: 1) a carefully and sensitively designed, pilot-tested and administered questionnaire and professional interviewers from an international market research company; and 2) the extensive data set from MicroSave's work on savings in Uganda over the last two years and qualitative research designed explicitly to explore these types of issues. Results: Losses -the Big Picture: The research revealed that 99% of clients saving in the informal sector report that they have lost some of their savings. 15% of those saving in the formal sector report that they had lost some savings and 26% reported lost savings in the semi-formal sector. Thus the formal sector, for those lucky enough to have access to it, is safer both in terms of likelihood of losing any savings and in terms of the relative loss (amount lost to amount saved). Those with no option but to save in the informal sector are almost bound to lose some money -probably around one quarter of what they save there. People who have access to the formal sector reported saving three times as much ($386) in the last 12 months than those who saved in the semi-and informal sectors. The people saving in the formal sector also reported a lower incidence (15%) of loss and a lower rate (3.5%) of loss in the last year. Almost all (99%) people saving in the informal sector reported that they had lost some money through informal savings mechanisms and on average they had lost 22% of the amount they had saved in the last year. Dollars (Converted at Ush.1,600:$1) 0% 20% 40% 60% 80% 100% 120% Annual savings Annual Loss % clients who lost Losses in the Formal Sector (commercial banks, pension funds etc.): 15% of those who saved in the formal sector had lost savings in this sector during the last year. On average, they had lost around Ush.18,000 ($11) or 3% of the average Ush.618,000 ($386) saved during the year in this sector. The surprisingly high rate of loss amongst formal banks -ostensibly covered by the Bank of Uganda's deposit insurance scheme -is likely to have arisen amid the confusion surrounding the closure of the Co-operative Bank during the year. Several respondents had experienced problems trying to recover their savings from the Co-operative Bank. Either the balances verified as payable by the bank were substantially below those the clients had entered in their passbooks or the process of retrieving their savings was so lengthy (requiring multiple trips to the bank premises) that it effectively wiped out what little savings they had. Losses in the Semi-Formal Sector (MFIs, SACCOs etc.): 26% of those who saved in the semi-formal sector had lost savings in this sector during the last year. On average, they had lost around Ush.19,000 ($12) or 9% of the average Ush.210,000 ($131) saved during the year in this sector. 14% of the total sample had saved with an MFI during the previous year, and of these 90% had saved with an MFI using a group-based system. Within these, there is an apparently high (27%) incidence of savings lost amongst MFIs using group-based methodologies, however the average amounts lost (7% of savings made during the year) are relatively low. Most of the loss of savings experienced with group-based MFIs appears to have been as a result of the group guarantee system and members' savings being used to "balance out" the loans of defaulting group members. Losses in the Informal Sector (in-kind, at home, savings clubs, RoSCAs, ASCAs etc.): The losses in the informal sector are characterised by a very high incidence and a highly variable extent of loss as a percentage of the amount saved. It is interesting to note that the most risky forms of saving are the most popular: savings in kind and at home are the most commonly used and experience the highest rate and levels of loss in absolute and relative terms. Savings in kind is the most important form of informal savings: 82% of the sample had saved money in kind and they had saved an average of Ush.434,000 ($271) in kind. Of all the informal savings systems, savings in kind was the most popular and attracted the largest amount of savings -respondents only saved similar or greater amounts in formal sector financial institutions. 68% of the sample had saved at home in the last one year and out of these, 68% had lost some of their savings. On average they had lost Ush.38,000 ($24) or 26% of the average amount they had saved during the previous 12 months. In 45 % of the cases the loss had been due to the respondent's own or their family's petty spending. 27 % had lost due to demands of friends and relatives for assistance. In 13 % of the cases, savings had been stolen. Many poor people set up reciprocal arrangements whereby they save by lending. Lending to a neighbour or relative today sets up a reciprocal arrangement under which the neighbour or relative will lend back tomorrow in times of need. Reciprocal lending as a form of saving has another advantage: the money is out of reach of marauding husbands and relatives and the temptations of trivial spending -it is typically only returned in times of real emergency. In the study's sample, 41% of respondents had saved through reciprocal lending arrangements. However, this is clearly a risky form of saving -it depends on the goodwill and liquidity of the neighbour or relative. With a loss rate of 69% in the sample, clearly the goodwill/liquidity are not always available. It is noticeable how relatively few (23%) of the sample have participated in a Rotating Savings and Credit Association (RoSCA) in the last 12 months. In addition, they had saved relatively small amounts -on average Ush.139,000 ($87) or Ush.2,700 ($2) per week. Given their simplicity and reputation some might be surprised at the relatively high proportion (27%) of those who had used RoSCAs had lost money.