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B. Microsavings Contrary to common belief, the economically active poor can and do save. They often have no choice but to save because they know that in times of emergency, their options are limited. They typically do not have health or life insurance, they experience significant income losses if they are ill, job security tends to be limited and they do not have pension schemes (Harper, 2003a). However, since commercial banks are often unwilling to incur the costs involved in handling the small deposits of poor people, deposit facilities are seldom available to the economically active poor.

Without access to formal savings services, the poor typically save at home, in informal savings associations or by using the services of deposit collectors. They save by keeping cash in the household or in kind, e.g. by investing in land, grain, livestock, raw materials and jewellery. However, cash savings are often unsafe since other household members may take them and there is danger of theft or accidental destruction. Investing in nondivisible assets makes savings illiquid and carries the risk of losing value (e.g. animals may die and raw materials may deteriorate). Many poor people save in rotating savings and credit associations (ROSCAs) or in accumulating savings and credit associations (ASCAs)8. However, particularly the former have fairly rigid procedures and timing.

Moreover, the size of funds may not necessarily coincide with financial needs. In absence of a reliable place to store their money, the poor often pay deposit collectors and accept a negative interest rate for their savings.

Box 1.4 Rotating Savings and Credit Associations in Chanderi

Chit funds are the South Indian form of rotating savings and credit associations and serve as substitutes for formal financial institutions. At each meeting, the ‘winner’ is determined through a random draw. The person who wins is immediately given the entire amount collected but must continue to contribute in subsequent meetings until all members have received the fund once. If there is a delay in payment, a fee (e.g. in Chanderi, Rs 20 or USD 0.45 per day) is to be paid.

Since banks and other financial institutions are inaccessible to weavers in Chanderi and relatives rarely have the capacity to help them, weavers feel they have no other option but to approach shopkeepers and/or traders or to participate in a chit fund. Almost one third of weaver families, in particular Muslims, regularly contribute around Rs 100 (USD 2.20) to a chit fund in the hope of winning a lump sum. However, when this happens, the amount is spent on urgent needs rather than invested in income-generating activities. People play in the hope of being able to repay debts, purchase durable goods or marry their daughters with the money ‘won’.

During a participatory poverty assessment in Chanderi, it was established that the total value of chit funds in the surrounding area was about Rs 111,000 (USD 2,450) per week, with 800-900 members (approximately 500 families) contributing. This represents a circulation of more than Rs 5 million per year (USD 110,000) and an average contribution of over Rs 10,000 (USD 220) per family per year.

In ROSCAs all members are both savers and borrowers and the capital of the fund does not grow during its lifecycle since a new fund is formed and depleted during each meeting. In ASCAs, by contrast, all members are savers but not necessarily borrowers. The fund is lent to members and grows with the interest charged.

ASCAs offer more flexibility than ROSCAs in terms of loan sizes and timing.

© United Nations Industrial Development Organization


In contrast to informal savings, deposit facilities with microfinance providers ensure security, liquidity, convenience, divisibility of savings, confidentiality, access to loans and returns9 (Robinson, 2001). They allow the poor to accumulate the lump sums required for life cycle events such as births, marriages or funerals, for religious obligations and for school fees. Savings also play an important role in reducing vulnerability. They represent a fall-back option for the poor in times of emergencies and enable them to meet unforeseen expenses such as those arising from illness or death of a relative. They help smooth consumption by making it possible to resort to past income during lean periods.

By alleviating the need to resort to informal financial sources, access to savings services can help wean away the poor from moneylenders. Microentrepreneurs can benefit from access to savings services to facilitate self-financing of working capital needs, accumulating funds for investments in productive equipment and/or taking advantage of unexpected business opportunities.

The availability of both savings and credit products can be particularly beneficial for microfinance clients. Such a combination of financial products improves microentrepreneurs’ ability to manage working capital needs by borrowing and saving when required. Business profits can be deposited and savings can be used to purchase assets which in turn can serve as collateral for larger loans. Offering a combination of

deposit mobilization and credit facilities in rural areas has an additional economic benefit:

it helps keep savings in rural areas and thus stimulates regional economic growth. This in turn may have second-order effects on reducing poverty.

The provision of deposit facilities not only benefits the clients, but also the providers of microfinance. A savings component increases the funds available for on-lending without needing to resort to external sources. If savings serve as a guarantee, they can reduce a lender’s risk. The provision of saving services by a microfinance provider may enhance clients’ perception of ownership and thus potentially their commitment to loan repayment (Ledgerwood, 1999). Finally, the likelihood of loans being used for consumption purposes is reduced if savings facilities are available.

Many microfinance providers, even those not providing voluntary savings facilities, require compulsory savings before loans can be accessed. It is claimed that compulsory savings test clients’ ability to make periodic contributions and to manage cash flows, which is of importance for loan repayment. They help borrowers to build up an asset base and thus demonstrate the value of regular savings. There is, however, considerable debate about the usefulness and desirability of compulsory savings. Opponents maintain that the poor know how to save and do not need to learn financial discipline. For clients, compulsory savings represent an additional cost of accessing credit since the opportunity costs of not investing the funds in the borrower’s business may be significant. If compulsory savings cannot be easily withdrawn, borrowers may be taking out loans for amounts that are less than their accumulated savings.

However, returns are typically of least importance to poor savers with limited access to savings services.

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Wage workers in Sindhudurg would benefit significantly from the availability of savings products to reduce the hardship of seasonal unemployment. Workers - women in particular - are typically not hired on a permanent basis. Work in cashew microenterprises is normally only available during three to four months per year and agricultural daily wage labourers usually only find employment for five to six days a month. Access to savings products may facilitate consumption smoothing and alleviate the need to sell productive assets in times of limited income.

C. Microinsurance Due to their low income and asset levels, the poor are particularly vulnerable to adverse shocks. Like savings, insurance services (such as life, accident, health or property insurance) can help the poor cope with unexpected events or emergencies and prevent them from sliding further into poverty. Unlike savings, however, insurance products allow clients to obtain more funds than they paid in - if the event that was insured occurs. Yet, the poor are typically not insured against the risks they face daily. They often do not know about insurance, they may not be able to afford it or insurance companies do not offer suitable insurance products for the poor (Harper, 2003a). There are still few microfinance providers offering insurance products, although the number is rapidly increasing.

Most microfinance institutions do not have the skills and financial strength to provide viable insurance services. However, they do not necessarily need to offer microinsurance themselves but can act as intermediaries between insurance companies and their clients.

Partnerships between microfinance providers and insurance companies provide benefits for all involved. The poor benefit from greater insurance coverage at lower cost than if the microfinance provider offered insurance coverage on its own (Brown, 2001). Insurance companies gain access to a new market segment while incurring minimal transaction costs. Microfinance providers can earn commissions from insurance companies and reduce the risk of non-wilful default if borrowers are insured against adverse events which can affect loan repayment (Harper, 2003a). Nevertheless, in most partnerships particularly where insurance companies have little experience with low-income clients insurance coverage continues to be restricted to basic life insurance, which is the least complex form of insurance. Whereas the poor could benefit from a variety of insurance products, poor households do not necessarily want to be insured against all risks. Brown (2001) reports that while microcredit clients in Cambodia valued health insurance, they were not interested in insuring themselves against death of livestock.

Some microfinance providers have incorporated a form of insurance into their group lending activities. In the Grameen Bank, for example, each member contributes 1% of the loan amount to a risk fund. In the event of a client’s death, the fund is used to repay the loan and to provide his/her family with money to pay for the funeral.

© United Nations Industrial Development Organization


Box 1.5 Insurance Scheme in Chanderi In Chanderi, UNIDO staff help weavers avail of a government insurance scheme. The Government of India (GOI), in cooperation with the Life Insurance Company of India, offers a welfare scheme for weavers under which weavers can insure themselves against accidents leading to injuries (minor and major) and against death. In Chanderi, 129 weavers are benefiting from the scheme. To obtain insurance coverage of up to Rs 20,000 (USD 440) in case of natural death and up to Rs 50,000 (USD 1,100) in case of accident, weavers must pay an annual fee of Rs 130 (USD 2.85).

As a part of the scheme, GOI and State Governments offer an educational scholarship to encourage weavers’ children to attend secondary schools. Per family, a maximum of two children attending grades nine through twelve are eligible to receive the scholarship of Rs 100 (USD 2.20).

The poor are often unaware of the existence of insurance. In many cases, introducing an insurance scheme in a cluster therefore needs to be preceded by education on what insurance is, why it is useful, what procedures must be followed to receive insurance and how to file a claim. In Chanderi, UNIDO has been instrumental in making weavers aware of the scheme’s existence and has played the role of facilitator. UNIDO staff helped weavers fill out insurance forms and collected the annual fees.

D. Payment Services Payment services include check writing and check cashing rights as well as the transfer and remittance of funds from a place to another. Payment services are important to facilitate the procurement of raw materials and the sale of goods as well as to receive remittances from relatives that have migrated, be it to urban centres or abroad. Transfer services may be of particular importance to the economically active poor. Without them, entrepreneurs need to carry cash for all financial transactions. Since the risk of theft may force entrepreneurs to carry less cash, they may incur higher prices on purchases, lower prices on sales and higher costs due to more frequent trips (Hatch, Levine & Penn, 2002).

To be able to provide payment services, a microfinance provider must have an extensive branch network or relationships with at least one bank. Therefore, few are currently offering payment services despite their obvious importance to clients (Ledgerwood, 1999).

E. Gender Aspects of Microfinance In contrast to conventional financial institutions which have traditionally focused on men, microfinance providers tend to have a majority of female clients. There are three main reasons for targeting women in microfinance programmes: (a) to facilitate the provision of microfinance; (b) to maximise the positive externalities of microfinance and (c) to promote women’s empowerment.

For many microfinance providers, the reason for focusing on female clients is mainly of a practical nature. Repayment rates are typically higher for women than for men, partly because women tend to have fewer alternative sources of finance and are easier to reach.

Women are also seen as more compliant and reliable. They are perceived to have a higher

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sense of responsibility and to be more affected by social pressure than men (Harper, 2003a; Ledgerwood, 1999; Simanowitz & Walter, 2002).

Another reason for targeting women is that the positive externalities of microfinance seem to be greatest when it is provided to women. Improvements in women’s economic and social status appear to have a greater impact on the health, nutritional and educational levels of other household members than those of men since women seem to spend more of their income on the household.

Many microfinance providers have the explicit goal of empowering women by providing them with greater financial security and increasing their economic position in society10.

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