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Underinvestment in Savings-led Microfinance, A Costly Market Failure Image

Promoting Inclusive Markets and Financial Systems

Underinvestment in Savings-led Microfinance, A Costly Market Failure

Underinvestment in Savings-led Microfinance, A Costly Market Failure


In 2007 the Microcredit Summit Campaign reported that over 133 million people worldwide had been served by microfinance. CGAP estimates that over $1.5 billion is now committed each year to microfinance, just from public funding sources such as multilateral and bilateral aid agencies. There are many thousands of microfinance institutions (MFIs) using this funding to serve these people. Numerous impact evaluations suggest that this investment in microfinance is yielding returns, in terms of a substantive positive effect on the lives of its customers.

There are two broad ways in which microfinance can be implemented – the credit-led and the savings-led model. To date, the vast majority of activity and donor funding has been for the credit-led approach. Other than India’s Self Help Groups, which do not constitute the augmented savings-led approach discussed here, the credit-led approach is used to serve 97% of customers and receives 98% of public donor funding. A small number of NGOs, including Oxfam, Pact and CARE, run an augmented savings-led model. This typically involves the NGOs helping to form women’s groups, followed by 9 to 18 months of training, together with mobilisation of savings. At the end of the training period the groups form village banks and lend out the savings as would a creditled MFI. This augmented savings-led model thus enjoys all of the benefits of the creditled model, plus the additional benefits of the investment in human capital, at a fraction of the cost. New Monitoring & Evaluation data from Pact’s program in Nepal is analysed and shows quite startling levels of social impact, economic activity and sustainability. Analysis of global savings and loans, together with this datum from Nepal, suggests that savings can be mobilised in many parts of the world to meet demand for credit. Even factoring in the fact that the credit-led model can disburse loans quicker than the savingsled model, a Net Present Value (NPV) estimate of the future discounted impact flow suggests that the augmented savings-led model has from 2.5 to 9 times the NPV of the credit-led model.

The fact that a superior microfinance technology exists in the form of the augmented savings-led model, but receives virtually none of the investment, suggests a massive market failure in the development marketplace. This failure is in part due to the effects of path dependency and in part due to the misalignment of incentives in donor organisations. It is interesting to note that private foundations are beginning to show interest in a technology which will yield a higher return on investment. There is a variety of actions which the donor, NGO and microfinance communities can take to address this market failure. Discretionary funding is required to allow the pioneers of the augmented savings-led approach to build capacity. Rigorous impact evaluations are required. A strategic approach to marketing their technology is needed by the NGOs. Actions are required by the NGOs to make is easier for donors to disburse large amounts of funding.

The microfinance movement was built on innovation. In recent years it has begun to include savings services and is now working on insurance products. The augmented savings-led model represents another opportunity for the movement to adapt, leading to enormous impact in the lives of those it serves.

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