The Future of Microfinance: Savings and Insurance

The world's poor need more than credit. They need real savings and insurance options, too. How can microfinance help?

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Making a living off $2 a day is hard. Making a business off $2 savings accounts might be even harder. But that's exactly what some banks are trying to accomplish as they seek to expand microfinance to include savings and insurance.

People living on less than $2 a day are active money managers who juggle shopkeeper credit, wage advances, private savings, and other informal instruments on a monthly basis, according to the book Portfolios of the Poor. But whereas more and more $2-dollar-a-day families have access to credit, very few have access to formal savings or insurance.

What are microsavings and microinsurance, and how can they help the world's poor?

That's where microsavings come in. Last November, the Bill & Melinda Gates Foundation pledged $500 million over five years to increase access to savings worldwide.In a phone conversation, Bob Christen, Director of the foundation's Financial Services for the Poor group, said this kind of help is absolutely necessary, because the world¹s poorest communities want to save, but have few secure ways of doing so.

For microsavings to work, they have to drastically cut banking costs. Low-income clients will typically have account balances under $80 and make frequent deposits under $5. No standard bank with branches and tellers could afford to maintain such accounts because the cost of each transaction is near $1. But Christen believes "there's a historic opportunity to reduce transaction costs through agent banking," where local petty shop owners double as deputized bank tellers while using mobile money and point-of-sale devices to transact cash, confirm identities, and keep books up to date. He predicts that transaction costs could go as low as 15 cents with this model.
As such platforms expand in scale while lowering costs, Christen envisions a rich ecology of private firms, government infrastructure, and non-profit organizations delivering new financial services to ever more remote regions. Christen has a quarter of a century of experience with microcredit behind him, but it's only recently that he's considered efficient microsavings possible. He focused on the challenge of lowering transaction costs.

Another class of services gaining momentum is microinsurance. Women routinely save 10-15% of their monthly income for health emergencies that can wipe out savings, said Mary Ellen Iskenderian, President and CEO of Women's World Banking, a network of worldwide microfinance institutions. Her firm is starting a microinsurance trial in Jordan where a premium equal to one day's wage per month - or 3% of income - provides health insurance that pays out for every night the client spends in a hospital, including stays associated with childbirth. According to Iskenderian, the insurance provides a sense of security to women who then feel less need to stash away cash, and in turn are able to apply income towards other expenses like education. Compared with credit as a way to handle emergencies, Iskenderian says, "microinsurance is a more efficient use of capital."


Christen and Iskenderian both highlight efficiency in microfinancing-- whether it's lowering transaction costs, making small accounts worthwhile, using capital more efficiently, or permitting services to be extended farther and wider.

But there are two brands of efficiency, and only one is healthy. One brand eliminates corruption, waste, and silly ways of doing things that cost more and achieve less. The second brand - let's call it "faux-efficiency" - focuses solely on hard metrics and judges anything not easily measurable to be waste that should be cut. There's a slippery slope that connects the two, and for many who believe in corporate efficiency, there is no distinction. Yet, they are worlds apart.

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Kentaro Toyama is the W.K. Kellogg Chair Associate Professor at the University of Michigan School of Information. He is the author of Geek Heresy: Rescuing Social Change from the Cult of Technology. More

Kentaro Toyama is the W.K. Kellogg Chair Associate Professor at the University of Michigan School of Information, where he teaches and researches technology in the context of social causes. Toyama graduated from Yale University with a Ph.D. in computer science and Harvard University with a bachelor's degree in physics. He is the author of Geek Heresy: Rescuing Social Change from the Cult of Technology

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