The forgotten half of microfinance

“Microfinance is a movement, a way of life. It goes back to the roots of saving and lending. People want to have control over money again, they do no longer trust their money to bankers as easily as before the crisis”, Lector Financial Inclusion Klaas Molenaar from The Hague University of Applied Sciences says. 

Initiatives where people turn their back towards institutions and organize their pensions, social security or energy are mushrooming around the globe. There is also a renewed focus on microfinancing, and a call for a broader approach that includes ‘saving’. “There is something in the air, people take their own life back in their own hands”, Molenaar adds. 

Microcredit was no silver bullet

Saving and asset building are often neglected in microfinance, although they play a crucial role. Without savings, people are much more vulnerable to unexpected life events such as illness, the loss of employment or irregular income patterns. Savings can also provide the capital necessary to invest in economic activities. 

In recent years a lot of critic has been cast on the focus of microfinance on loans. Enabling people shouldn’t start with a debt, the often heard critique is. More idealistically, microcredits are called “debt traps”, for example by Gina Neff, economic journalist. Professor Dean Karlan from Yale says that even as microcredit generates benefits it isn’t the silver bullet that it has supposed to be. 

Positive economic and social effects

Dean Karlan is also one of the biggest advocates for giving the poor access to savings accounts. Research indicates that savings have signi?cant positive economic and social effects on individuals, families, and communities. Economic activities again lead to greater stability, higher educational attainment, local civic involvement, improved health and general satisfaction amongst people. 

“However, savings remain rather neglected in the current debates on micro?nance in Europe. Microfinance Institutions in Europe tend to concentrate mainly on lending and seem to disregard savings. Rigid regulatory frameworks and the political drive for growth have created an environment where savings are viewed as outside the scope of micro?nance”, the European Microfinance Network (EMN) states. 

Let people build their own solutions

Gill Musk, development manager at the International Association for Community Development (IACD) believes that “the importance of microfinance is not yet understood by everybody”. Musk agrees with Molenaar’s that people turn away from banks and large anonymous institutions. “Let people build their own solutions instead of imposing them from outside.” 

When people speak about microfinance images from women groups in India or South-America pop up, but also Europe rediscovered microfinance. In the UK and Spain for example successful projects have been run. 

“Financial innovations we see as revolutionary new systems from the rural south are in fact mechanisms in which we used to operate for centuries. If they can do it in the slums of Mumbai, then we can do it here in Europe!” 

“Discussions around poverty and inequality tend to focus on income, not assets. Yet assets are far more unevenly distributed than income. For example, 50 percent of British households have less than 1000 pounds in assets. And more than 1 in 5 British households have more debts than savings”, Musk says. 

A better life for your children

“Does it matter that people have no savings? It sounds obvious, but it is disturbing to know how many of us aren’t saving. What will you do without savings when you lose your job, divorce or get ill? People are so much more vulnerable to these life events.” 

“Savings enable a lot of life choices. Let’s say, when you want to move or retrain yourself for another career. That is very hard without savings. It gives people the chance to bring about positive intergenerational change, to give your children a better future.” 

Groups play an important role in microfinance. In groups people stimulate each other to save money. “It is not only altruism, it is also partly self-interest. People that collaborate in microfinance groups help their community members but also secure their – and their children’s – future. Together this creates a strong incentive to collaborate in these financial systems.” 

Before saving in microfinance can become a success in the EU the frameworks need to change. At this time it is not yet legal in every Member State, while the advantages of saving over lending might be obvious in the post-2008 world.