The document examines why the MFIs in Uganda suffer such remarkably high levels of drop-out amongst their clients. The field study also seeks to improve understanding of why the current systems and services being provided by the Microfinance Institution’s appear (on the basis of these drop-out rates) to be failing to meet the needs and demands of the clients, and draws lessons for MFIs that wish to effect change.
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Use and Impact of Savings Services Among the Poor in Uganda
This study challenges the basic proposition that “the poor cannot save”, through its study in Uganda, where there is a vibrant and diverse informal financial sector. This report shares findings that improve knowledge and understanding of how poor people in Uganda save like in the formal sector—with the informal mechanisms like banks, moneylenders, pawnbrokers, money guards, deposit collectors, ROSCAs, ASCAs etc. which are the most commonly preferred by the poor. In between, MFIs constitute the semi formal sector. The study highlights the impact of savings on the poor people’s lives through which they can meet their life cycle needs, cope up with exigencies and opportunities to build up their wealth. It also presents impact of savings on various kinds of institutions.
Beyond basic credit and savings: Developing new financial service products for the poor
As the microfinance revolution continues, increasing number of microfinance institutions (MFIs) are seeking to diversify the financial services they offer to their clients. In particular, there is a growing awareness that improved client-friendly saving facilities can provide not only an important financial service to the poor, but also that such facilities will actually provide more capital funds for the MFI than the compulsory savings systems that have been so prevalent. The present paper examines the need for MFIs to offer their clients new financial products. It is written on the basis of the experience of BURO Tangail, an MFI in Bangladesh working to provide flexible and responsive financial services to its clients. It operates in what is perhaps the most competitive market in the world of microfinance.
Savings Are a human right (and good business too): The case for voluntary, open access savings facilities
Based on experiences drawn from Bangladesh, this essay puts forward a case for voluntary, open-access savings schemes as a profitable alternative to compulsory, locked-in savings schemes. It quotes examples from the experiences of BURO as opposed to that of Grameen Bank and BRAC. Locked-in “Group Fund” savings acted as de facto loan guarantee reserves and had allowed the larger MFIs to develop a huge capital fund for their lending operations. It was feared that allowing members to withdraw would result in huge outflow of funds.
The paper also analyses and shows how BURO has indeed demonstrated that voluntary open-access savings schemes can mobilise more net savings per member, per year, than compulsory locked-in savings schemes and provide a valued, and well used, financial service while doing so.
Replication: Regressive reproduction or progressive evolution?
Increasing numbers of organizations are “replicating” the programs of successful MicroFinance Institutions (MFIs). This approach allows rapid start-up using tested models and systems. These strengths are also weaknesses, since the models being replicated usually require substantial modification to make them appropriate for local conditions. Furthermore, close adherence to “blue-prints” is likely to substitute for careful research into the needs and opportunities for the provision of financial services for the poor – and thus the design of appropriate systems. Replication also risks the suppression of innovative ways of providing still better financial services – particularly when promoted by powerful apex funding organizations as is currently in vogue amongst donor agencies. Perhaps the most dangerous form of “replication” is that driven by consultants, leaders or donors designing or recommending systems they only partly understand, and thus giving incomplete or blurred blue-prints. Credit is also used as a way of attracting clients to meetings (where they can be required to participate in other activities – such as family planning etc.). This “part-time banking” is dangerous both as a result of the complexity of providing financial services and because the clients come to rely on permanent access to financial services.
Drop-outs, graduates, defaulters, and the excluded
There is compelling evidence to support the contention that a significant majority of “drop-outs” occur because Microfinance Institutions’ (MFIs) financial services are inadequate or inappropriate to meet the needs of the clients they are trying to serve. The document reviews four such issues facing MFIs worldwide, with evidences drawn primarily from Bangladesh, the cradle of group-based lending:
- that members leave MFIs usually because they are dissatisfied with the quality of financial services being offered by the organisation;
- that members might “graduate” to survive without access to financial services;
- that the single most effective deterrent for defaulters is the prospect of losing access to financial services – follow-on loans and savings facilities;
- that it is the systems and (in particular) the financial services of the MFI which will determine whether members “self-exclude” or not.