By Mark Schreiner (December, 2004)
http://www.microfinance.com/English/Papers/IDAs_for_Microenterprise.pdf
Abstract
Schreiner describes the arguments behind asset-building policies and proposes some adaptations to matched-savings programs for use in low-income countries. Schreiner concludes that while matched-savings are useful in the fight against poverty, they are no panacea and determines that:
- The only permanent way to escape poverty is to enact development policies that concentrate on building assets more than increasing income.
- Matched-savings programs, tested in developed countries, could be adapted for implementation in developing countries.
- Matched-savings programs develop a savings structure for the poor, helping them to increase their income, access subsidies and dispel misconceptions about savings.
- Though matched-savings programs are an expensive alternative, once open they can be funded by public or private sources alike.
Summary
The only permanent way to escape poverty is to build assets (physical, financial, social or human). Asset-building theory argues that the poor can devote very little to their education or training (to increase their human capital) and have little extra income to save (to build their assets). Thus, development assistance that focuses on assets will be more likely to achieve its poverty alleviation goals.
Matched-savings programs offer a viable path to poverty relief by providing large returns on savings, building assets and facilitating choosing to save, making it a "no-brainer" for the poor. For example, Individual Development Accounts (IDAs) are a matched-savings structure that allows a micro-entrepreneur who saves 100USD with a one-to-one match rate, to withdraw 200 USD to invest in his business. IDAs tested in the US and other developed economies, show that matched-savings attract participants, particularly micro-entrepreneurs and help to keep them motivated.
Political support for asset-building programs has grown in developed countries, while low-income country politicians are beginning to realize that people benefit from safe, reliable, convenient savings services. However, the approach between the two groups varies. High income countries are convinced that the poor only save if they have a financial incentive, while in low-income countries it is assumed that the poor are desperate to save and, thus, require only customized, but otherwise-standard savings accounts.
In order to adapt IDAs to low-income countries, the program should be kept simple and low-cost. Some guidelines include:
- Keep savings in regulated financial institutions, mainly for safety and legality reasons.
- Keep savings in unrestricted passbook accounts. Savers must be confident that they can access their savings at any time, but only asset-building withdrawals will be matched.
- Fees matter more than interest rates. The financial intermediary should be asked to waive all fees. The match rate matters more to participants. Interest rates can be bargained away.
- Reserve enough funds to cover potential matches. Participation should be limited and match caps should ensure that they can pay out all promised matches even if all participants 'max out'.
- Provide frequent statements. If the financial institution won't do it, the program should make arrangements to provide a statement with balance, corresponding match and remaining matching eligibility.
- Track savings carefully. Up to date tracking helps ensure sufficient match reserves and discourages fraud.
Regarding matches, the following recommendations are made:
- Advertise the match (using the financial institutions' name) will help create trust among the public.
- The match rate should be high, but not too high. In the US experience, match rates of more than one-to-one on savings were associated with lower savings. Usually, one-to-one matches are enough to attract people, are less costly and elicit more savings.
- Use match caps to target. Match caps at low levels will make the program attractive only to the poorest (ie. A 50USD per year match cap and one-to-one match rate).
- Provide matches for home improvement, education and micro-enterprises. The latter should be the most popular in developing countries due to high rates of self-employment.
- Providing a savings structure attracts funding sources: Public and private funds in the US and the UK have joined in to provide matches. Once an IDA is open, almost anyone, government, employers, or development organizations can plug into the structure.
To help keep costs down:
- Do not try to control the source of deposits or the use of matches. It is impossible to avoid the risk of money ending up in consumption instead of investment. One option for developing countries is to label the account 'Saving for Micro-business Assets' and continually remind participants of the purpose of the program.
- Disburse assets into participant's accounts. For developing countries, matches could be disbursed once a year based on average balances. It should be done during an asset-building season such as start of the school year.
- Do not try to inculcate habits. Requiring regular deposits to qualify for matches discourages those who miss a few months and those who get a lump-sum.
- Simple design helps keep costs down. The idea is not to control how they save, but to provide a highly rewarding savings structure and let them use it as best as they can.
Even if costs are kept low, providing explicit subsidies is very costly. It is important to have in mind that matched savings will not make the poor get rich quickly, but it is a way to nudge some people further along a path that may, with time and effort, improve long-term well being.