Borrowing to Save: Perspectives from Portfolios of the Poor

This briefing note examines the practice of borrowing while saving as illustrated by financial diaries of the poor in India and Bangladesh.

Research shows that people tend to be more impatient with current trade-offs than they are with future trade-offs, and it always seems more costly to forego consumption today than at some time in the future. The note makes the following observations that explain the phenomenon of simultaneous saving and borrowing:

• Poor people find it hard to rebuild savings after major withdrawals;
• People have more incentive to repay loans than to rebuild savings;
• Flexible repayment options of moneylenders and MFIs, and partnership with lenders provide support and generate discipline, while these aspects are absent in saving;
• High interest rate works as an incentive for faster repayment rather than as a deterrent for borrowing.

The note observes that the poor need an external force to help them save, given their unpredictable expenses and irregular cash flows. This is fulfilled by the interest component of the lender-borrower relationship.