The UN Capital Development Fund Explores Link Between Microfinance and Social Pr...
Washington, US, December, 08 2011 -
Last week, the UN Capital Development Fund hosted a high-level Thinkshop entitled “How can microfinance extend Social Protection in Asian Lesser Developed Countries (LDCs)?”. The event offered insight into new and potentially revolutionary role that microfinance institutions (MFIs) might play in helping protect the extreme poor through products that kickstart savings as opposed to causing debt.
Animating the event was the belief that “private financial arrangements provide the single biggest opportunity, albeit one of the least explored, to extend social protection in developing countries, and especially in Asian LDCs.” Other than being a stellar opportunity to share the groundbreaking work of our Global Savings and Social Protection (GSSP) Initiative and SPINNAKER, the event offered insight into new and potentially revolutionary role that microfinance institutions (MFIs) might play in helping protect the extreme poor through products that kickstart savings as opposed to causing debt.
The Thinkshop discussion centered on new MFI products that are, in the words of one participant, “savings products in loan’s clothing.” One great example is the P9, an attempt to “help [people] build substantial savings while at the same time managing liquidity through low-cost loans.” While the idea of building savings through loans may seem counter-intuitive, a closer examination of the product makes clear why it is one of Stuart Rutherford’s SafeSave’s most popular, and how it may lead to a redefinition of the role that MFIs can play in the lives of the poor.
While reading the product rules is necessary to understand fully how P9 works, the basics are as follows. To start, individuals take an interest-free loan of up to 5,000 taka (USD 65) that they can pay back on a schedule that they choose. Each time a loan is taken, half of its value is placed into a long-term savings account held in the client's name. Once the loan is fully paid back, the client qualifies for a 10,000 taka loan, half of which is also placed into savings. One of the most important facets of the product is that, by the time of the third cycle, when the client qualifies for a 15,000 taka loan, the risks of the MFI have been reduced to zero. At that point, the MFI will give 7,500 taka to the recipient, but will already have 7,500 of the recipient’s money in savings. In further rounds of loans (at 20,000, 30,000, 40,000), the MFI actually has more of the client’s capital on hand for investment than it is giving in loans, thus making the product extremely attractive to MFIs while also helping individuals build a substantial amounts of savings.
This product has been brilliantly marketed and very well-received (up-to-date data can be found on P9’s website), but it’s important to note that it is not all that different from loans offered by other socially conscious MFIs such as BRAC. Clients pay a 3% disbursement fee on P9 loans, so for instance, the first cycle will disburse 2,500 taka (with 2,500 in savings), and the recipient will pay a 150 taka fee. If the recipient pays back the loan in six months, which is average for P9 users, then she will have paid the same amount of money that she would have for a loan with an annual interest rate of 12%. In fact, as clients usually make weekly (if not daily) payments, the interest rate on a comparable loan from an MFI is probably upwards of 25%.
Whether or not MFIs can provide the financial products that help the poor build assets, UNCDF’s Thinkshop reflected the growing global consensus that financial inclusion is an important tool to protect the poor. Mexico’s President Felipe Calderon recently announced the largest ‘banking the poor’ effort in the world, which will reach over 6 million poor families, because he felt that “one key difference between the poor and the rich is that the latter have bank accounts.” India has launched its Unique ID project, where in addition to having citizens scan their fingerprints and irises at a rate of 1 million per day, 84 percent are simultaneously registering for no-frills bank accounts. In Peru, newly appointed Minister of Social Inclusion Carolina Trivelli has announced that all recipients of public benefits will be provided with bank accounts to promote financial inclusion.
Only time will tell if innovative MFI products like P9 offer something genuinely new to poor households, or are just loans with different packaging. Regardless of how that debate plays out, however, what is clear is that more and more governments and multilateral organizations are realizing how important formal financial products are in providing the poor with social protection.