Is Saving More Important than Credit?

This was the question raised at the second plenary session at last week’s Microfinance USA 2010 conference. As part of the conference team of bloggers, I was assigned to cover Andrea Levere’s opening address. She is the President of the Corporation for Enterprise Development (CFED) which helps disadvantaged communities build financial assets through matched savings programs and advocating public policy initiatives that create products for low income households.

The US government spends upwards of $367 billion a year on wealth building policies such as home mortgage interest tax deductions, 401k retirement savings plans and, more recently 529 college savings plans and health savings accounts. However, these initiatives primarily benefit the rich with over 45% of the benefits going to households earning $1.25 million per year. In her speech, Ms. Levere outlined a more balanced, three point approach for assisting lower income people build their financial assets.

1. Matched Savings
Savings are an essential anti-poverty tool and with the proper incentives the poor will save, according to Ms. Levere, at “unimaginable rates.” Saving encourages the poor to aspire to own their own homes and send their children to college. It was noted that homeowners with Individual Development Accounts (IDA) were two to three times less likely to have faced foreclosure during the recent recession and that children with savings accounts were seven times more likely to go to college.
2. Matching Sources and Uses of Funds
The key to business success is having access to the right kind of funds for differing business needs. The well-to-do can start businesses with equity raised from friends and relatives; the poor need equity grants or the “patient capital” that come from such funders as Opportunity Fund, one of the sponsors of the conference.
3. Eliminate Barriers to Scale
Ms. Levere stated that US MFIs need to learn to use the internet more effectively to build scale for micro-savings products. She mentioned SaveTogether.Org as one US-based social business working to do just that.

Microfinance is not a “silver bullet” that will single handedly eliminate poverty but is a critical tool for solving this very complex issue. Now is the time, Ms Levere concluded, to get the public policies right for creating better options for the poor to build their assets and become as productive as they can be.

In the panel discussion that followed her address Ms. Levere asked each panelist to respond to the question “Is Saving more important than Credit?” I thought the first respondent, Ben Mangan, President and Co-founder of EARN, a local San Francisco non-profit that has assisted over 3,000 low income savers accumulate more than $4 million in savings, got the answer right when he said “It depends.”

Mangan pointed out that not everyone is an entrepreneur and able to make good use of micro-credit for building a business. Both credit and saving provide opportunity but saving also provides a form of insurance for the poor and is, in his words, “a ‘long-tail’ product that encourages the poor to make more aspirational decisions.”

I thought about this comment later when viewing “To Catch a Dollar,” the documentary about Mohammad Yunus and the founding of Grameen Bank. When he discovered that poor women, struggling to make a living weaving baskets, were being victimized by money lenders he did not suggest that they start savings accounts. Instead, he made the initial loan that help them break free from these Bangladeshi “pay-day lenders.”

Where one sits on the spectrum of poverty also matters with regard to the relative importance of credit or saving. Those at the very bottom of the pyramid have little to save and much to gain from access to reasonable credit. As one moves up the economic ladder one can afford to have greater aspirations which can be met through efficient saving products. In reality, both are important and are essential tools in the fight against poverty.