Small Deposits Add Up: Savings, Not Just Loans, Factor into Microfinance Formula

By Suzie Boss

Yak herders in Mongolia may seem like the most unlikely of bank customers. There’s little infrastructure in their largely rural country, making it tough to find a local branch office. But in these sparsely populated steppes, opening a personal savings account is increasingly seen as a first step out of extreme poverty, according to international microfinance leaders.

Until relatively recently, Mongolia’s poor were among the world’s “unbanked,” overlooked and underserved by formal financial institutions. Without access to credit, those on the margins of the economy struggle to stay a step ahead of the loan sharks and moneylenders. Financial illiteracy often persists for generations.

Microfinance is slowly changing this picture. By offering small, no-collateral loans to rural villagers and the urban poor, microfinance institutions (MFI) enable borrowers with scant resources but smart business ideas to improve their lot in life.

When a dozen microfinance leaders gathered in Portland, Ore., recently, at a global forum sponsored by Mercy Corps, I expected the conversation to focus on loans. So I was surprised to hear the emphasis on savings.

“Can poor people save their way out of poverty? It’s a fundamental question in development,” acknowledges Steve Mitchell, vice president of financial services for Mercy Corps. The global aid organization considers microfinance a key strategy to combat poverty and has spent a decade building its network of MFI partners around the world. Increasingly, these institutions are expanding their offerings to include savings products. Many cite the example of Grameen Bank, the microlending pioneer, which has seen its customers in Bangladesh emerge from extreme poverty through a combination of savings and loans.

Mongolia is one place determined to demonstrate the power of small savings, as well as small loans, to improve its standard of living. XacBank, based in Ulaanbaatar, has $220 million in assets after nearly a decade of operations. “We loan to yak herders, embroidery women, shoe shiners—people who get a spark of courage to start a small business,” explains CEO Bold Magvan. Over the past decade, XacBank has extended its reach by opening rural branches and developing mobile banking services. Virtually everyone in the country, Magvan says, “now has a bank account.” [XacBank is a sustainalbe, independent MFI created by Mercy Corps]

XacBank is offering new incentives to promote savings among these first-generation bank customers. Their small savings accounts have big potential: Not only do they offer a means of improving family finances, but they may also help reduce the bank’s reliance on external funding.

“Too much outside help can be harmful in the long term, especially if there are downturns," Magvan says. “Mobilizing local investments makes us less dependent.”

How does one of the most rural places on earth, where a third of the population lives in extreme poverty, encourage the savings habit? One strategy is to start early. A XacBank program called “Future Millionaires,” for instance, encourages families to open children’s savings accounts at birth. These accounts pay a high interest rate but do not permit withdrawals until a child reaches age 18.

Another savings product caters specifically to teen girls. An initiative of Women’s World Banking with funding from the Nike Foundation, this year-old effort aims to improve economic opportunities for girls and young women who have been “the forgotten population in microfinance,” according to Mary Ellen Iskenderian, president and CEO of Women’s World Banking.

After school, Mongolian girls meet with XacBank staffers for lessons on “how to save and spend wisely,” Magvan explains. “Then, they can open their savings book,” which is colorfully branded for teen appeal. Bottom line, he adds: “They love having their own accounts.”

These youth-oriented programs are attracting new customers—who will be more likely to use formal financial services as adults. Globally, child savings accounts have the potential “to spur the social and/or economic development of children,” according to recent analysis by the Global Assets Project. Starting adulthood with a nest egg offers a cushion against economic shocks and creates another benefit that’s hard to quantify: hope.

Encouraging savings, while also building financial literacy, is a strategy for serving the underbanked in more developed parts of the world, as well. In the U.S., an estimated 40 million households are currently unbanked.

Mercy Corps NW, the U.S.-based arm of the global nonprofit, offers a matched-savings program to low-income clients in Oregon and Washington. While clients are accumulating savings with monthly deposits, they study financial education and put together a business plan for a microenterprise. “If they can save $1,000 over three years, we’ll match it three to one,” explains John Haines, executive director of Mercy Corps NW.

A variety of small businesses have emerged from this incubator program, including home-based daycares, masseuse services, and artisan-run shops. It’s no accident that the majority are women-owned. All over the world, says Mitchell of Mercy Corps, “women make better borrowers and better savers.”

Suzie Boss is a journalist from Portland, Ore., who writes about education and social change for Edutopia, the Stanford Social Innovation Review, and other publications.