1. Savings and Insurance Lecture # 7 Week 4

2. Structure of this lecture From group to individual lending From individual lending to “savings” Why financial institutions do not intermediate savings? Vulnerability  Insurance? More or less vulnerability under group or individual lending?

3. From group to individual lending We saw in the last class non-refinancing threats and progressive lending. Other mechanisms include: Flexible approaches to collateral Financial collateral Making repayments public Targeting women Information gathering by bank staff Cross reporting

4. And, from last class: Other mechanisms such as non-refinancing threats and progressive lending are often used in conjunction with GLJR In a large majority of Microfinance Institutions (MFIs), borrowers are forced to save –often perceived as collateral

5. From individual lending to savings Until recently, the Grameen Bank collected compulsory and (individual) voluntary savings Largely viewed as a way of securing some form of collateral Voluntary savings became increasingly important. In turn made MFIs revisit the Q: Can the poor really save and if so why and how? A. Yes, the poor can save. Mainly to smooth consumption over time. Do so in a rather peculiar way, however.

6. Anecdotal evidence from Rutheford (2000) Jyothi is a deposit collector in southern India Jyothi works in the slumps, mostly with women Her job: collect money from clients, keep the money securely, and returned the money less a fee to her clients after a pre-specified period of time In particular: clients agree to save a little bit each time for 220 days At the end, Jyothi gives the money back to her clients less a 9 percent fee Rutheford (2000) estimates that the effective interest rate is negative 30 percent “Poor seem to be willing to pay well for convenient and secure saving services”

7. Increasing empirical evidence on poor households facing “saving constraints”: India: Morduch (1994) Pakistan (Kochar, 1996) China (Jalan & Ravaillon, 1997)  - 

8. Why financial institutions do not intermediate savings? Common wisdom: poor people are too poor to save Social norms No need because of informal channels (i.e., Jyothi) Poor too impatient, prefer to borrow Promoting services increases vulnerability

9. Microfinance institutions can potentially satisfy poor’s demand for savings Problems: a)Transaction costs are too high -  BRI might show the way to reduce such costs b)Absence of regulatory framework  Large MFIs elsewhere can intermediate savings

10. While lowering transaction costs and a more lax regulatory framework might help to promote savings, poor remain vulnerable Q: maintaining group lending methodologies can help? Yes. Poor remain vulnerable, however: idiosyncratic and aggregate risk relatively high Subsidized MFIs offering Insurance: a) crop insurance, b) life insurance, c) health insurance Q: Does gender matter?  Next Class: Armendáriz – Morduch on Gender ( Chapter 7) & Armendáriz – Roome (2008)