The key to effective financial inclusion is a safe and confidential savings.
Managing money well begins with hanging on to what you have. This means avoiding unnecessary expenditure and then finding a safe place to store whatever money is left over. Making that choice — the choice to save rather than to consume — is the foundation of money management.
— Stuart Rutherford
The importance of savings has been understood from very early times even in the modern age. As early as 1924, the international community designated October 30 as World Thrift Day with the objective to stress the importance of savings for modern economies and for individuals alike. Wealth begins with the first coin in the piggy bank. What sounds like a banal commonplace is today as true as ever.
There’s an old saying about poverty: give me a fish, and I’ll eat for a day. Give me a fishing rod, and I’ll eat for a lifetime. There are several variations in this theme. But these days, there is a general view that one of the most effective tools to fight poverty may not be a fishing rod, but a savings account. What we need is a savings revolution. I remember in my secondary school days we saw a bank as a place to save; they would take good care of money, and might even add a little to it, and perhaps we could take some of the money out one day.
When I first opened the account of my own I received a little booklet, the ubiquitous passbook, in which every deposit and withdrawal was acknowledged by the bank staff. I learnt that keeping track of the transactions was the personal hygiene of finance, like brushing your financial teeth. The implicit message, not just for me, but I think for society at large, was that the bank account was the locus of money management. All one’s main financial transactions would pass through the account, and the account would serve as a barometer of our financial health.
So my own and maybe most the people’s first view of a financial institution was that it was a place to save. Borrowing might come later, much later, and the purpose of saving was not to qualify for borrowing; it was a useful thing to do for its own sake.
Why should it not be the same for the poor? The truth is that much of the world is in crisis today because of debt — too much borrowing, not enough savings. This philosophy has been the cornerstone of personal finance for adults in the developed world. And it is now the key focus of governments in developing countries. Governments and financial institutions are now engaged in a vigorous battle to integrate the unbanked into formal banking, not just for their business but to open a window for the poor which allows the global development winds to touch their lives.
There are basically three financial needs of the poor:
Life cycle needs: Life cycle events that impose financial burdens include — births, deaths, marriages, education, home-making, widowhood, old age and the need to leave something behind for one’s heirs.
Emergencies: Impersonal emergencies are caused by floods, cyclones, fire, etc, while personal emergencies include illnesses, accidents, bereavement, desertion and divorce.
Opportunities: Financial and lifestyle opportunities can require large sums of money for starting or running businesses, acquiring productive assets (including land and housing), or buying life-enhancing consumer durables (fans, radios, etc).
The key to effective financial inclusion is a safe and confidential savings. The older ones always advise the younger ones to keep a store of value that other family members do not know about. When there is an emergency, they will understand your wisdom and appreciate. Despite conventional wisdom, poor people actually do save, even if it is just pennies each day. They use a variety of informal mechanisms: hiding cash at home, loaning funds to relatives, participating in rotating savings groups with their neighbours, engaging deposit collectors, buying livestock or other physical goods such as jewellery or construction materials.
Savings serve as a form of self-insurance and enhance the sense of well-being. They are a source of self-employment and job creation — encouraging and enabling families to imagine a future better than the present, and to prepare and plan for that future. Lower-income families can convert savings into home purchases, education and businesses. To use financial services to their full potential, to protect their families and improve their lives, the low-income people need products well suited to their needs. Bringing this about requires products that suit their living patterns. Financial products designers hardly want to do the hard work of first understanding how the poor think, followed by designing suitable products. They, therefore, need access to a basket of financial services. It is imperative to understand why people do not save, in order to design products that incentivise them to do so. A one-time incentive for opening the account is not enough to ensure that they continue to save and use the account.
Melinda Gates co-chair of Gates Foundation is a diehard votary of savings and has pledged $500 million to promote savings and other financial services. “Savings doesn’t just help people mitigate the risks posed by a medical emergency or a bad crop,” says Gates. “It also gives them the ability to marshal their resources to build something better for themselves and their children. It allows them to fund their own businesses, to look ahead with confidence. Savings helps families to take the giant leap from reacting to events to planning for a healthier, happier future.”
Financial inclusion isn’t just about numbers — it’s about people. And when more people have access to high quality, affordable financial services, they have more opportunities to thrive. This is specially true for women who are often underserved by traditional financial institutions. There’s no work ethic like that of a poor woman. She toils tirelessly for the good of her family, putting their needs before her own. Even in traditional societies, no matter how oppressed women are or the degree of literacy, they are often the stewards of family savings.
Three years ago, Prime Minister Narendra Modi launched a steroidal savings account revolution. Thousands of bankers and banking agents fanned out across the country to reach people in far-flung villages and city slums. The nationwide campaign yielded stellar results and set many world records. To open an account now, reams of identity documents are no longer needed — and money for a deposit isn’t necessary, either. Money, which was earlier kept in tins at home and was open to loss or theft is deposited in the account that pays interest and is insulated from the daily demands of life.
India is now on the cusp of a new savings pathway that shows hope — and an opportunity provided we sustain the same zeal, commitment and momentum.
The writer is a well-known banker, author and Islamic researcher. He can be reached at firstname.lastname@example.org