Discarding obfuscating shibboleths in microfinance
The problem with notions is that they are often vague, misleading and mostly wrong. In all cases, vague, misleading or wrong, an untested notion will lead its purveyors into error, which they inevitably pass or even impose on the larger society to its detriment. Again, notions are often without caveats. They make no room for variation. One notion that held sway for long in microfinance was the belief that the poor did not need savings outlets because they had nothing to save. This notion, which is now discarded, was not only wrong but absolutely so. The negative imprint it left on microcredit was transferred to microfinance and still lingers on. It is that wrong notion that made savings mobilisation a tangential rather than an important aspect of microfinancing.
It is the need to avoid the propagation of errors emanating from repeating wrong notions that Fela Anikulapo Kuti warned Nigerian leaders to stop the practice of demeaning their citizens by calling them names. He said they were always saying “my people are useless, my people are worthless”. We often hear things like” Nigerians are unpatriotic” “The masses are fools” “This is Nigeria; we don’t need research and grammar” and such. These are notions that die hard but bring no benefit. Instead they put people down. These are what I call Shibboleths. They become obfuscating when they confuse and confound, as they often do. Fela was wiser than some of the leaders of his time for noting that such shibboleths cannot bring solution to any problem.
The need always exists for individuals, groups and corporate organisations to make rational decisions on how to allocate their incomes between consumption and savings. Savings decision is therefore a portfolio decision on the use of disposable income now and in future.
There are different ways in which individuals may save, including keeping money in cash, which for poorer people is likely to be under pillows in the house or in the shops. It may be institutional or in-kind savings. Institutional savings may be formal (bank deposits); semi-formal (savings by cooperatives) and informal, by way of Esusu, Rotating Savings and Credit Associations (RoSCAs) and Accumulating Savings and Credit Schemes (ASCAs). In-kind saving involves keeping money in hard assets such as animals.
The need for effective savings mobilisation in the general well-being of the economy has gained considerable following because of the economic value of savings. Not only do savings support Social Overhead Capital accumulation through long-term funds provision, they help in the development and institutionalisation of financial sector discipline and capacity building. Financial sector discipline grows when regulators impose standards on deposit-taking institutions and enforce them.
Why is savings mobilisation low among MFBs? Savings is a latter day development in microfinancing. It was not an original component of the industry. The focus was on credit because the original aim of the industry was simply to serve as a channel for providing credit to the active poor. Microcredit, as the forerunner of microfinance, had little to do with savings mobilisation until much later. Besides, right from the outset, the precursors of the industry, mostly churches, societies and Non-governmental Organisations (NGOs), provided only microcredit because they were mostly donor-supported or charity oriented. The donors had money to give and their interest was to give it to the identified channels.
Furthermore, there were myths surrounding savings and poverty. Until recently, following research findings, it was believed that savings was very low among the poor. They were incapable of making savings and therefore need no deposit facilities. This is why savings was described as the “forgotten side” of microfinance. However, we now know that these are indeed obfuscating shibboleths that have been shattered.
There is no longer any doubt that the poor need savings services, just as much as they need credit. Households will save, no matter their level of income, once they find an appropriately structured institutional channel. MFI will thereforedo well toprovide that needed channel and seriously promote the savings culture. Unfortunately, that does not appear to be the situation at the moment. The shibboleth of the inconsistency of saving with low income still persists.
Offering savings and credit services together strengthens a microfinance institution. It is now well-established that deposit-taking MFIs operate within stricter rules and regulations than their credit-only counterparts. Indeed, the whole idea of regulation and supervision of MFIs is derived from the need to enforce greater discipline to better secure depositors’ funds. The consequences of failure, especially of large institutions, often described as Systemically Important Banks, are usually economy-wide. Accordingly, what we have in most jurisdictions is that deposit mobilisation is never permitted for MFIs without first establishing appropriate rules, regulations and implementing institutions.
Such regulatory and supervisory frameworks are deliberately strong for good reasons. They propel deposit-taking institutions to develop higher management and general organisational capabilities than their credit-only counterparts. Provision of savings services also makes an MFI a complete financial intermediary. This status requires more sophisticated liquidity and risk management capabilities. Furthermore, there are considerable synergic effects with regard to costs and market knowledge that follow the provision of savings and credit services together. Resulting trade-offs combine to produce valuable synergic effects in the operation of a financial intermediary. This also helps them to cope with regulatory and Supervisory requirements.
Sadly many MFBs are bereft of any meaningful deposit base. They appear uninterested in deposit mobilisation because they think it is an impossible. This may be the result of some shibboleths they carry. Shibboleths are like incantation and slogans, which are sometimes useful. However, if they merely confound the object of their use, they need to be discarded. MFI should discard the shibboleth of low savings among the poor as it has become a disincentive to savings mobilisation and dangerous to their health.
Emeka Osuji