18 November, 2008
The Importance of Savings in Microfinance
by Tamsin Harriman
Thai Finance Ministry recently proposed a plan to extend 110 billion baht in loans to rice farmers. The Thai government's interest and participation in micro-finance is commendable, but perhaps it’s not the best approach. While loans alone may help alleviate poverty temporarily, they are not a sustainable solution. Borrowers often become trapped in a "loan cycle", in which they keep having to borrow over and over again to even maintain their farms or businesses. However, by encouraging or even requiring borrowers to open a savings account (with mandatory deposits) if they wish to take out a loan, this unsustainable situation can be prevented. Instead of always having to take out more loans, borrowers can tap into their savings when they need to invest in their businesses, their houses, their children's schooling and many other things that can improve their, and their families', lives. In addition, a savings account provides easily accessible extra cash, which is vitally important in case of an emergency (e.g. a natural disaster that wipes out a farmer's crops).
Many MFIs, in Thailand and worldwide, have already realized that savings is an essential part of micro-finance. A focus on savings not only benefits borrowers; it also benefits MFIs. This year Common Interest Foundation, in Northern Thailand, transitioned from a loans-only program to Village Banking, which heavily emphasizes saving. Since doing so, the foundation has realized significantly higher repayment rates - most of its original Village Banks have already paid off their loans, with a repayment rate of 100%. Many other MFIs, including Grameen Bank, whose repayment rate is now 98%, have experienced similarly positive results since adding savings to their programs.
The Thai government's micro-finance programs have poor repayment rates. Its Village Fund program has a repayment rate of only 50%, as previously discussed. As the above evidence suggests, adding a savings requirement to their loans could greatly improve the situation. If the Thai government wants its programs to be sustainable, and to permanently improve the lives of its poor, it needs to encourage savings, not simply give out more loans.
Thai Finance Ministry recently proposed a plan to extend 110 billion baht in loans to rice farmers. The Thai government's interest and participation in micro-finance is commendable, but perhaps it’s not the best approach. While loans alone may help alleviate poverty temporarily, they are not a sustainable solution. Borrowers often become trapped in a "loan cycle", in which they keep having to borrow over and over again to even maintain their farms or businesses. However, by encouraging or even requiring borrowers to open a savings account (with mandatory deposits) if they wish to take out a loan, this unsustainable situation can be prevented. Instead of always having to take out more loans, borrowers can tap into their savings when they need to invest in their businesses, their houses, their children's schooling and many other things that can improve their, and their families', lives. In addition, a savings account provides easily accessible extra cash, which is vitally important in case of an emergency (e.g. a natural disaster that wipes out a farmer's crops).
Many MFIs, in Thailand and worldwide, have already realized that savings is an essential part of micro-finance. A focus on savings not only benefits borrowers; it also benefits MFIs. This year Common Interest Foundation, in Northern Thailand, transitioned from a loans-only program to Village Banking, which heavily emphasizes saving. Since doing so, the foundation has realized significantly higher repayment rates - most of its original Village Banks have already paid off their loans, with a repayment rate of 100%. Many other MFIs, including Grameen Bank, whose repayment rate is now 98%, have experienced similarly positive results since adding savings to their programs.
The Thai government's micro-finance programs have poor repayment rates. Its Village Fund program has a repayment rate of only 50%, as previously discussed. As the above evidence suggests, adding a savings requirement to their loans could greatly improve the situation. If the Thai government wants its programs to be sustainable, and to permanently improve the lives of its poor, it needs to encourage savings, not simply give out more loans.
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