The Relative Risks to the Savings of Poor People
Central banks often cite the protection of poor people's savings as a reason for regulating MFIs and prohibiting semi- and informal deposit-takers. However, informal savings mechanisms often prove more risky than unregulated MFIs and this article demonstrates that poor people lose as much, and usually more of their savings in informal savings mechanisms, such as ROSCAs, ASCAs, savings in kind, and especially savings at home.
Although smaller MFIs are risky institutions to which to entrust savings on a relative basis the article shows that many are likely to be far safer than the most common informal mechanisms the poor are forced to use by policies that prohibit MFIs from mobilizing savings.
The authors state that:
- Efforts should be made to identify and close down semi-formal institutions seeking to deliberately defraud poor people;
- Attempts to regulate all semi-formal deposit-takers out of existence will simply drive this important sector of the rural finance industry underground and out of the reach of training and technical assistance programs that might strengthen them.
The briefing note recommends that, in order to improve the security of poor people's deposits held in smaller MFIs it is necessary to:
- Help clients understand the relative risk of savings in these semi-informal institutions;
- Encourage serious semi-formal sector MFIs to seek some form of external accountability (e.g. registration of the ROSCA/ASCA with the local government authorities or the international parent organization) and publicize this fact;
- Improve internal supervision (accounting systems, internal control, governance, transparency);
- Look to developing an accountability framework for MFIs;
- Make efforts to identify and close down fraudulent semi-formal institutions.
Overall the authors conclude that very often all the alternative savings systems available to poor people are risky. As such, it would be better to provide higher quality information to poor people about the risks involved of the various alternatives open to them.
