the savings of the poor: improving financial services in bangladesh

THE SAVINGS OF THE POOR:IMPROVING FINANCIAL SERVICES

IN BANGLADESH1

STUART RUTHERFORD�

Dhaka, Bangladesh

Abstract: The capacity of the poor of Bangladesh to save is surprizingly largeÐ

surprizing to observers, and surprizing to the poor themselves. This capacity has long

been used, with modest success, as the basis for self-help savings-and-loan devices that

the poor (like others) have used in the absence of formal banking services. But over the

last twenty years an innovative form of ®nancial service provision has been developed in

Bangladesh by `micro-credit institutions' (MCIs) such as the Grameen Bank, BRAC and

ASA which has exploited this capacity to save, to the bene®t of millions of rural people,

and at the same time brought pro®ts to the MCIs. Splendid though this development has

been, it could be more splendid. For under the systems adopted by the MCIsÐwho are

fundamentally lenders rather than ®nancial intermediariesÐ the poor can exploit their

capacity to save only by going into debt. This paper argues that a shift in approach

would allow the MCIs to o�er a much better service to a broader range of

customers (including the very poor), and bring surprizing bene®ts to themselves as

well. # 1998 John Wiley & Sons, Ltd.

J. Int. Dev. 10: 1±15 (1998)

INTRODUCTION

This paper is arranged in four sections. In the ®rst, I establish that the success ofBangladesh's famous lenders to the poor, like the Grameen Bank, BRAC, and ASA2

(micro-credit institutions, or MCIs), is based on the capacity of the poor3 to make

� Correspondence to: Stuart Rutherford, House 25, Road 15, New Dhanmondi, Dhaka 1209, Bangladesh1 I was helped by several people who commented on various drafts. They include David Wright of ODALondon, Graham Wright of ICDDR-B Dhaka, Martin Greeley and Sanae Ito of IDS Sussex, MunirQuddus of North-South University Dhaka and the University of Southern Illinois, Sha®qual HaqueChowdhury of ASA, Bangladesh, and two helpful but anonymous readers for this journal. Thanks to all ofthem. I claim total responsibility for any remaining errors of fact and judgement.2 BRAC: Bangladesh Rural Advancement Committee; ASA: The Association for Social Advancement.Both are national-level registered NGOs.3 No absolute de®nition of `the poor' is attempted in this paper. That there is a range of poverty amongMCI borrowers is self-evident, and where the term `poorer' or `poorest' is used it is based on local

CCC 0954±1748/98/010001±15$17.50# 1998 John Wiley & Sons, Ltd.

Journal of International Development: Vol. 10, No. 1, 1±15 (1998)

savings out of normal income. This assertion is supported by showing how themechanisms involved are rooted in the realities of household economies, are well-understood by the poor, and are basic to most traditional forms of self-help ®nancialintermediation.

The second section shows that what the MCIs are o�ering the poor, welcomethough it is, is in fact a second-best service. This is because with the present MCIservices the poor can exploit their new-found capacity to save only by going into debt.The limitations that this brings for borrowers, and the way in which it makesmembership of the MCIs di�cult for the very poor, are explained.

The third section shows what could be done to improve matters. If the MCIs were®nancial intermediaries rather than just lenders they would be able to o�er the poor abetter service, encourage poorer customers to use their services, and move morequickly away from dependence on donors for their ®nance.

The last section, the fourth, makes a plea for ®nancial services for the poor to beseen as a worthwhile service in its own right, and not as a handmaiden of non-®nancial objectives such as poverty alleviation, social cooperation, or the empower-ment of women. This would encourage MCIs to concentrate on the key issues in®nancial services for the poorÐ the intermediation of savings into loans, disciplinedprocedures, the elimination of entrance barriers, lower transaction costs (for both theprovider and its customers), and ¯exibility and range of services.The paper is based on evidence collected during twelve years of running and

observing ®nancial services projects in both urban and rural Bangladesh.4

1 THE SAVINGS OF THE POOR

How villagers use MCI services

We begin in a village in Bangladesh. Aworker from one of the biggerMCIs, (GrameenBank, BRAC or ASAÐ it doesn't matter which since their basic systems are similar)has been recruiting women to form a group of twenty or thirty members. He (most aremen) explained that regular attendance at a weekly meeting and some trivial com-pulsory weekly savings will qualify the women, after a few weeks, for loans starting at3,000 taka ($75) for each member. The loans will have to be repaid in a series ofweekly instalments over a year. In the case of the $75 loan the instalment will be $1.70a week, including interest. Successful repayment by each member of the groupaccording to this schedule will qualify them for further and bigger loans next year.

Some richer women (or their husbands) rejected the proposal, saying that the sizeof the loan was too small. A few households with a little land who farm but do noother cash-generating work were also disappointedÐwhere would they get the cashfrom each week? Some of the very poor were put o� by their anxiety about managing$1.75 a week from their small and unreliable incomes, week-in week-out for ®ftyweeks. Their view was reinforced to them, somewhat hypocritically, by more

2 S. Rutherford

perceptions expressed by or implicit in the words of villagers. The paper does not explore the complexissues of the di�erences between the poverty of individuals and that of their households, nor the genderdimension of poverty.4 As a designer, manager, observer and writer of both MCI-type and other savings and credit schemes forthe poor.

J. INT. DEV. VOL. 10: 1±15 (1998) # 1998 John Wiley & Sons, Ltd.

prosperous villagers who thought that including the very poor in their group wouldrisk repayment failure, with unfavourable consequences for all. A few people wereuncertain on religious or other moral grounds. But a very large group of poor andnot-so-poor village women and their husbands were attracted to the idea. A dollarseventy-®ve would represent about a day's income for many craftsmen, smallshopkeepers and traders, and a little more than that for rickshaw-pullers and somelabourers with particularly secure jobs. For most of the year there should be nodi�culty giving up a day's income each week, and in the tough monthsÐ ashwin andkartik5 when the ®elds are under a single rice crop and there is very little workaboutÐmost families felt they could manage with a little belt-tightening or with helpfrom better-placed relatives.

The story of Montu Miah and his wife, a couple I met in 1993, shows how thingscan work out for such households.

The Savings of the Poor 3

Montu's frightMontu Miah is a poor illiterate agricultural day labourer who hires and pulls arickshaw when he can't get work in the ®elds. His wife, who has a class three passand normally makes the household management decisions for the couple, told himshe was going to join an MCI group. She said she'd have to save 5 taka ($0.12 US)a week. Montu was vaguely anxious (what if they couldn't save the 5 takaÐwouldthey be in trouble?), but he let her have her way. Then a few weeks later his wifecame home from a group meeting accompanied by her brother6 bearing severalbundles of roo®ng tin for their dilapidated hut. She had bought them with her ®rstMCI loan. Smiling encouragingly at him she said they'd have to repay the loan bypaying 50 taka a week for a year. Fifty taka? wailed Montu, where would they getthat from? Then on top of that they'd have to pay a carpenter to ®x the tin. But inthe end they managed. Montu worked harder, pulling the rickshaw a few hoursextra each day. They cut down on the tiny luxuries they had enjoyed. It was nosurprize to Montu's wife who had long suspected that given the right incentives sheand her husband could easily save 50 taka a week out of their regular income. Itjust needed the opportunity to getting a loan and the pressure of having to pay itback to get them saving in a sustained way.

Montu and his wife spent their loan on roo®ng sheets, an investment that mosthouseholds like to make as soon as possible. Roo®ng tin can always be cashed in intimes of trouble, while thatching is expensive to replace year after year, and leaksrainwater unhealthily onto the family's sleeping mats. Others used some of the moneyfor treating illness, or for children's schooling. For several borrowers a highproportion of loan capital went on food, partly to build up stocks, and partly toprotect existing assets like livestock or ®shing nets or bicycles that might otherwizehave to be sold for food in the lean season. Some older and more expensive loans fromtraders and wealthier relatives were repaid out of loan capital. Many householdsspent the money on more than one activity, some on three or four. Buying a few hensand ducks commonly featured among these multiple activities, since selling eggs or

5 Mid-September to mid-November.6 Because she is constrained by custom from going to the market to buy the tin sheets herself.

# 1998 John Wiley & Sons, Ltd. J. INT. DEV. VOL. 10: 1±15 (1998)

birds can provide a little ready cash which can be put towards the MCI loanrepayments. Three other uses were common. Many cows were bought, many womenwizely kept part of the capital back to guarantee their ability to repay during di�cultweeks (a simple form of loan insurance which is more rational than it looks at ®rstsight (Rutherford, 1995, p. 119)) and many chose to re-lend all or part of their loans(Fukita, 1994). Relending serves many purposes. Through it, poorer households notformally enrolled in an MCI group can get access to its bene®ts. Farmers and otherswho would have di�culty with weekly repayments if they joined an MCI themselvescan negotiate more suitable terms with MCI loan recipients. And capital-starvedbusinessmen in the bazaar who are anxious to expand their shops are willing to o�eran interest-rate premium to borrow from group members. Above all, members lackinga pro®table use for their loans can ®nd one through on-lending.

Advances against savings

This ¯exible range of uses for loans, all of which borrowers ®nd helpful, is madepossible by the key feature of MCI lendingÐ tiny weekly repayments. Such a regimeallows borrowers to repay out of normal weekly income. Or perhaps we should saythat it gives the borrower con®dence that it can be paid from normal weekly income,should other sources fail. Borrowers who feel that, without too much discomfort, theycan repay by saving a day or two's income each week con®dently invest in whateveruse of the loan best ful®ls their needs of the moment. In terms of their place in thehousehold economy, weekly-repayable MCI loans can best be described as `advancesagainst savings'.

There is one use we have yet to mentionÐ investment in small business enterprizes.While not uncommon, this is not the dominant use, and is generally restricted tocertain types of borrowers. The better-o� among that middle range of villagers whoform the bulk of MCI groups are often the owners of small businesses, usually inretailing or trading but sometimes in production, and they are able to invest in stock-in-trade. For them, the returns on this additional investment in existing businesses isoften enough to service the weekly loan repayments. Some poorer borrowers use theirloans to buy a small class of assets that can produce an immediate stream of incomebig enough to repay the loan and allow them to hold on to the asset, providing theyare willing to work long hours. These are in the transport sector: a rickshaw, forexample, can be had for $125±$175 and, if it is pedalled daily for a year, can produceenough income to pay o� the loan and return a basic household income. Outside thisrestricted set of enterprizes new loan-funded businesses are rare, as a look at the cash-¯ows would suggest. With interest rates at around 25 per cent a year and loan capitalhaving to be repaid within a year (as it does under MCI rules), a new business wouldhave to produce a rate of return of 125 per cent just to service the loan. If workingcapital is needed (rickshaws avoid this need) and if the family is to be fed, the requiredrates of return become astronomically high (ADB, 1994, p. 67). This being so, it iscurious that MCI schemes are touted world-wide as promoting a move by the landlesspoor into new o�-farm businesses. Rather, they help expand some existing businesses,and allow many poorer households to move into a fresh range of supplementarylivelihood activities while remaining dependent for their main income (and for theirloan repayments) on traditional income sources such as day labouring.

4 S. Rutherford


How the poor manage their ®nancial services

The idea that MCI loans are most often repaid out of savings from weekly incomesometimes provokes disbelief among micro-lending promoters. But poor villagers andMCI ®eld-level sta� know otherwize. Asked to explain repayment problems, ®eld sta�nearly always say `this is a di�cult time of the yearÐ there's very little work about.Where are they going to get the money to repay?' Villagers themselves know fromexperience the relationship between savings and borrowings. To see this, we need tolook at how the poor commonly cope with their ®nancial services needs.

Wherever poor people get access to basic ®nancial servicesÐabove all to savings,insurance and credit (including hire-purchase) servicesÐ they use them in the sameway that other people do. Such services are needed:

. to manage the fact that income and expenditure may occur at di�erent times;

. to deal with anticipated large expenditures, such as marriage costs;

. to deal with emergencies and other unforeseen calls for cash;

. to obtain ®nance for use or investment in personal, household or business life; and

. to make provision for old age and for heirs.

It is not true that the poor have any particular aversion to nor di�culty with theconcept of saving, nor do they have some peculiar need for credit that is unique tothem as a class.

Because the poor have limited access to ®nancial services they often pay a high pricefor it. This premium has attracted much attention when it is expressed as high interestrates on loans. Less well-known is the fact that the poor often pay heavily for thechance to save. This can take the form of accepting high risks and low or zero interestrates (as when the poor deposit cash with patrons who may cheat them and willcertainly not reward them) or of making do with second-best ways of savings(for example by buying livestock),7 or even of accepting negative interest rates(as when the urban poor make daily payments to deposit-takers and get back, amonth or 100 days later, less than their total deposits) (ODA, 1995, p. 15).

The village intermediaries

With or without access to commercial ®nancial services the poor (like other groups)have devized and continue to use many ways of providing services for themselves.8

Lending between family members and between friends, usually without interest butbased ®rmly on the principle of reciprocity, forms one broad class. A second class ofsuch devices, savings clubs of various sorts, including ROSCAs,9 are more complex,


7 Of course, buying livestock can sometimes be a preferred way of saving.8 The existence of these devices on ®ve continents, and the similarities in the way they are used, suggestthat the basic ®nancial services of savings, loans and insurance are common to any cash-based society, andnot the product of industrialized economies. Thus in arguing for improved services I am not merelyadvocating the emulation of Western norms.9 Rotating Savings and Credit Associations, in which a ®xed group of people meet regularly to deposit a®xed saving, the whole of which is taken on that occasion by one of their number (chosen by consent,lottery or auction). The ROSCA continues until everyone has taken the `pot' once, by which time all havecontributed and received equally (Bouman, 1995; Maniruzzaman, 1993).


and involve groups of people in a series of transactions spread over time. Inevitably,these clubs are based on savings, sometimes just as a means of helping an individualsaver to build up her own capital, but more often involving the intermediation ofsavings into loans.

The poor, then, place a high value on the opportunity to save and to borrow, whichthey demonstrate through their willingness to pay a premium, and they are familiarwith (and continuously inventive about) the processes through which savings can beintermediated into loans. Evidence that this is true in Bangladesh as elsewhere fallsinto three broad categories.

First come the examples of self-help devices. These include the savings clubs ofwhich Maloney and Sharfuddin (1988, pp. 63±113) have provided a well-documentedsurvey. In this category too falls the ROSCA, a form of self-help intermediation thatcame late to Bangladesh but which is growing quickly. It has taken root among therickshaw-drivers of the main towns, where it is slowly transforming the pattern ofrickshaw ownership (Maniruzzaman, 1993), and is increasingly common amongurban and suburban housewives (who may belong to several at a time), and femalegarments workers. It is beginning to challenge other forms of ®nancial-resourcesharing among commodity traders in rural market places. Semi-commercial versionsof the ROSCA (which would be called `chits' in other parts of South Asia), where amanager earns a reward for organizing the ROSCA, are emerging, at least in Dhaka.

Second comes our increasing understanding of how the poor use moneylenders.Many poor people establish a regular relationship with their moneylender, taking asmall loan (say 1000 taka, or $25), paying it back in tiny regular instalments and thenimmediately taking another similar loan. In this way they convert small daily savingsinto useful lump sums. The need to repay provides the discipline to save regularly thatthey need to overcome the di�culties of saving at home. In this, they are behaving justlike Montu's wife.

In the third category are the experiences of organizations that already o�erdisciplined intermediation-based ®nancial services to the poor. These range from asmall Cooperative Bank10 in Dhaka that collects savings from the poor on a dailybasis and ®nds a strong demand for its services from poor urban slum dwellers, to aregional NGO11 that sells accumulating ®xed deposit plans to villagers and recyclestheir savings as loans. This NGO, without any recourse to donor grants, and workingon commercial lines, has built up a network of over seventy rural branches, anachievement which challenges the convention that NGOs need grants or soft loans toget credit schemes going. Among NGOs that do take donor money there are a pro-gressive few12 that successfully o�er a broad range of savings plans, and sometimeslife or debt-relief insurance, to their poor rural customers alongside the loans. Thereare also successful autonomous village-based Credit Unions13 that include the poor,and o�er evidence that the collapse of state-sponsored credit co-operatives was moreto do with the nature of the state intervention than with the Credit Union conceptitself.

6 S. Rutherford

10 Federal Savings.11 SDS, the Social Development Sangsad, of Tangail District.12 See for example the plans that BURO Tangail, also of Tangail District, has for the development of itsprogramme over the next ®ve years.13 For details consult CCULB (Cooperative Credit Union league of Bangladesh).


2 A SECOND-BEST SERVICE?

All MCI group members are required to save a little each week: the median amount isaround 5 taka (12 cents). In some schemes the amount to be saved each week is ®xedand invariable across members and seasons. This compulsory saving is stored in thename of the individual group member and earns a little interestÐ some MCIs set therate according to formal bank savings account rates, currently around 6 per cent ayear, and some are a little more generous. These represent real rates (nominal rate lessin¯ation) ranging from the negative to the barely positive.14 These MCI savings arenot at all comparable to formal bank savings accounts: savings cannot be withdrawnunless the member formally leaves the group and thus abjures the chance to borrow.With these terms it is not surprizing that most members set little value on their savingsas such and see them as part of the price of the loan.

Even so a number of members would like to save without borrowing. But withvarying rigidity the main MCI schemes forbid this. Formal rules may not bar it, butin practice most branch managers frown on members who balk at taking loans. Fromtheir point of view theirs is a lending institution, and their branch's pro®ts come frominterest on loans. With membership rigidly ®xed by the group formation system ataround 1200 or 1800 members per branch, pro®t maximization relies on each andevery member borrowing all the time. Hence one of the great curiosities of the bigBangladesh MCIsÐ they are perhaps the only banks in the world where practicallyall the customers have an outstanding loan practically all the time (Rutherford, 1995,p. 116).15

MCIs are thus primarily lenders, and act as ®nancial intermediaries only to theextent that they supplement their loan funds, which come mainly from donor grants,with forced savings taken from customers.16 They have pioneered an astonishinglysuccessful mechanism that allows the poor to take loans against their capacity to save,but they haven't set out to capture more than a fraction of those savings as formalsavings deposits. Does this matter?

It matters for two main reasons. Firstly, it raizes entrance barriers against thepoorest. Secondly, it means that the poor can exploit their capacity to save only bygoing into debt, with uncertain and undesirable long-term outcomes.

Problems for the poorest

MCIs are lenders, so their customers are borrowers. This makes the MCIsinhospitable places for the very poor. Given their economic weakness the poor areoften loath to borrow. Moreover, the `group collateral' approach used by the MCIs,


14 Current estimates of Bangladesh's rate of in¯ation (June 1996) are around 8.5 per cent pa.15 New group members still on probation (or waiting for funds to become available) will not of course haveoutstanding loans.16 Nevertheless, the total sums captured through forced savings are quite substantial. In ASA's case,members' forced savings account for more than a ®fth of ASA's total lendable fund. At Grameen in 1994the ratio of current, short-term, savings bank and `special' savings to revolving funds received from donorswas about 13 per cent. But Grameen also withholds 5 per cent from all disbursements as a `group fund',and this has grown to represent a sum worth 78 per cent of the value of all grants received from donor andother institutions (Grameen Bank, 1995, p. 19). The ownership of this group fund has recently been thesubject of controversy between the Bank and some members.


under which grouped customers are jointly responsible for each others' loanrepayments, gives better-o� members a strong incentive to keep the poor out. Finally,the pressure on branch sta�17 to maintain the famously high levels of repayment thatMCIs enjoy gives them a strong incentive to accept as borrowers only those whoseeconomic position is already strong enough to be able to make the repayments out ofnormal resources. Sta� commonly exclude a wide range of the poorestÐ thosewithout homestead land, those without an able-bodied male family member (neededfor marketing in a country where female seclusion is common), those without assetsthat can be seized, and those who may be slow to understand the rules. In general,those excluded are the poorer or more disadvantaged. Speci®cally, they are thosewhose introduction to formal ®nancial services would most conveniently have comethrough the opportunity to save.

Using savings to build debt

Borrowing useful sums against future savings is a powerful mechanism which hasbrought bene®ts to millions. But powerful as it is, it has its limits.

For any given regime of repayments the upper limit of the loan size will relate tothe maximum savings capacity for the given period. Thus if every loan is repaid in50 weekly instalments (the normal in¯exible MCI rule) the maximum safe loan sizewill be 50 times the maximum weekly savings capacity. AsMCIs grow older and invitecustomers to increase their loan sizes each year that maximum capacity, thoughelastic, will eventually be exceeded, at least for many customers. There are signs,especially in older branches of the biggest MCIs, that this point has been reached,with falling on-time repayment rates and increasing numbers of customers falling bythe wayside. This process tends to sift out the poorer customers. Those who havesecure income (those with businesses that can be expanded by successive MCI loans,for example, and above all in trading) are better placed to increase their weeklysavings rate than those who have used their loans for more basic pressing needs suchas health and housing. Finding themselves unable to meet increased repayments,some of the latter are now having to liquidate their modest compulsory savingsbalances to repay loans, and quit the MCI. Typically, they emerge with few or no®nancial assets, and no alternative access to a service provider.

There is a second important limitation of `advances against savings'. We haveestablished that the poor have a remarkable capacity to save out of normal income.The current crop of MCI projects capitalizes brilliantly on that capacity. From theMCIs' point of view this has meant excellent repayment rates and pro®ts ampleenough to lead towards independent growth and sustainability. An ASA branch, forexample, covers all of its current costs and makes an interest payment on loan fundsreceived from head o�ce by the 10th month of its life. But from the customer's pointof view there is an important limitation: this new-found capacity to save can beexploited, under current MCI rules, only by going into debt. The strict repaymentregime enforced by the better MCIs certainly provides the disciplined environment

8 S. Rutherford

17 In a government-run MCI, TRDEP, branch sta� have been formally threatened with the loss of their jobif on-time repayment rates fall below 95 per cent. This gives rize to what I have called `kisti stress' amongsta� (kisti is an instalment): (ADB, 1994, p. 23).


which we all need if we are to save at a high level and regularly, but savers pay a highprice for the opportunityÐat least 20 per cent a year (Grameen) or as much as 32 percent a year (ASA18 and BRAC, early 1995) in interest on their `advances againstsaving'.

Costs, and crafted loans

MCI projects raise other costs for customers besides the interest paid on advancesagainst savings. First, despite the rhetoric of `the bank that comes to the village', toobtain a loan entails about ®fty separate consecutive compulsory day-timeattendances at weekly meetings at which repayments are made and a moral discourse(which usually has nothing to do with ®nancial services) may be delivered. For mostmen (particularly the labouring poor who depend on scarce job opportunities) this isan almost impossibly high transaction cost, especially as many projects do not o�ermeetings after working hours.

The rural poor of Bangladesh survive by a mix of income-generating andexpenditure-saving projects which change over time and include casual employment,farming, trading, petty manufacture, harvesting common property resources andstarving (Rahman and Hossain, 1995). This keeps them busy, and they are certainlynot sitting around waiting for an MCI loan to arrive and transform their lives. Anyloans they may take are invested in any way that makes sense at the time within thisshifting panorama of personal or household projects.

Given this, the in¯exible term ofMCI loans (repayable by weekly meetings over oneyear) and the fact that borrowers exercize very little control over the size or timing oftheir loans (which are disbursed and sized according to a set sequence) means thatloans may not be appropriate to the borrower's particular project-of-the-moment,and considerable ingenuity and some cost may be involved in crafting the loan intosomething useful. For example, a loan taken to buy a small productive asset may haveto be invested initially in some other useÐ such as on-lending or in labour-intensivelow-pro®t activities like paddy-huskingÐuntil repayment is complete a year laterand the asset can be bought and put to productive use without working capital beingeroded by the weekly repayments. In another example, the fact that a loan may beissued at an inconvenient time of the year means that a borrower will have to seek atemporary advance from a second creditor or, conversely, seek a safe place to holdloan capital until the best time for its use arrives. Loan size can be another problem.Sometimes the loan available is too small for the intended purpose and has to bestored until other funds can be got: the fact that the MCIs don't accept withdrawablelump-sum savings then becomes a problem. The more or less automatic loan sizingsystem under which loan sizes increase by 1000 taka each year also pushes someborrowers into accepting larger loans than they can pro®tably use. Yet anotherproblem is that most MCIs don't accept prepayments on loans, so that a borrowerwho sells a goat for 400 taka ®nds that she is allowed to use only part of it to repay herloan, and is left with the problem of storing the rest. Sometimes, several of theseproblems come together, so it is not surprizing that anthropological observations of


18 ASA has more recently reduced its loan rate to around 26 per cent APR (Rutherford, 1995, p. 97).


MCI groups at work usually reveal a rich current of inter-lending, on-lending,negotiation, anxiety and grumbling.19

3 TIME TO INTERMEDIATE

True banks

There has been much discussion about MCIs turning into true banks,20 but in theBangladesh context at least this has been seen merely as a regularizing of the lendingthat MCIs already do. It has yet to be seen as a chance to turn lenders into trueintermediaries, to their own and to their customers' advantage. A true bank for thepoor would have the following features.

First, it would o�er a savings bank service accessible to and attractive to the poor.This means accepting tiny deposits (as little as one taka) at high frequency (daily ifpossible) at convenient locations (home or workplace or village meeting point) and atconvenient times. These opportunities to save must be accompanied by somedisciplining or incentive device (or both) to persuade customers to save regularly andso build up capital at the fastest practical rate: interest rate bonuses or ®nes are one setof such devices, access to loan privileges another, and there might be scope for usinggroup discipline. The savings must earn a positive rate of interest high relative to otheropportunities. The savings must be accessible, either through withdrawals or by use assecurity against loans, and such access must be rapidly available and built into thescheme as a right, not as a matter of judgement by scheme sta�. The savings, oncebuilt up to a substantial sum, must be o�ered alternative attractive homes, such astransfer to ®xed-deposit accounts earning higher rates of interest. The bank, ofcourse, must earn and keep the trust of its customers: here there is a clear need forappropriate (preferably self-) regulation.

Second, it would o�er loans secured against savings balances. Loan terms andrepayment schedules should include a clear set of choices. Thus there might be termsof one, three and six months, a year and two years, and schedules that allow forinstalment as well as lump-sum repayments, along with interest rate regimes that giveborrowers incentives to choose the safer options. All loans will attract interestexpressed and payable monthly on a current-balance basis, to provide the clearestinformation to the borrower about her loan status and cost, and thus add a furtherincentive to repay. The absolute interest rate on loans will re¯ect the need to employcapital pro®tably and cover costs while still giving customers an incentive to choosesaving over borrowing. Relative to current MCI rates, they are likely to be highish.

Good for all

Before demonstrating that these ideas are workable in rural and urban Bangladesh inthe late 1990s, I summarize the advantages such a bank would bring.

10 S. Rutherford

19 Conversations with Jude Fernando and Amin Rahman, PhD candidates respectively at Penn State,Pittsburgh, and Manitoba.20 For example at the international conference `Finance Against Poverty' at Reading University, UK,March, 1995, organized by the Universities of Reading and Manchester and the World Bank.


First, it would be a boon to the very poor. They would gain immediately by accessto a safe deposit-holder willing to accept frequent and tiny amounts. They could thenchoose to remain savers, building up short-call capital in their regular account andkeeping a proportion in a ®xed-term better-rewarded instrument. Or they couldbecome borrowers, in sums (related to their capacity to save), at times, and withrepayment schedules, of their own choice. They would be neither excluded initiallynor part of system which eventually spits them out. Rather, as savers, they would besought after as valuable customers.

Second, it would present the average poor customer with a much wider, more¯exible and thus much more useful set of services than currently available at MCIs.For many, their capacity to save out of regular income could be a source of earninginstead of a net cost, as it is under MCI terms. The range of loan terms would enablethem to ®t loans to current household projects much more snugly than is possible atMCIs.

Third come the advantages to the MCIs. As specialists in working with a massmarket among the poor they are still without much competition.21 By opening up thedeposit-taking part of that market they can gain access to a large, growing and ¯exiblepool of capital. This would be preferable to dependence on donors on three counts ofwhich the most obvious is the total size of the available pool of concessionary®nancing and its long-term dependability.22 Second, by providing customers with amuch stronger reason to be interested in the health of their bank (because they havetheir savings invested in it) their branch sta� anxieties about repayment would bereduced. Third, as MCIs grew away from their dependence on donors they would re-orient themselves to their customers, encouraging a more determined e�ort toresearch and oblige customer preferences and so win market share and pro®ts.Hitherto, MCIs have not been noted for the strength of their market research, to saythe least.23

There is also an obvious gain for Bangladesh as a whole. As a country with one ofthe lowest savings rates in the world (not unconnected to its state of under-development) Bangladesh would do well to exploit the recently discovered savingscapacity of the poor majority of its people.

Making it work

The key tests for the feasibility of the move from lenders to intermediaries that I haveargued for lie in the following areas. Are the savings there to be made and can thepoor be persuaded to make them? Can the public risks from deposit-taking (which aremuch higher than the risks from lending) be safely taken? Can the MCIs maintainsta� probity in a ®nancial services programme that is more variegated and complexthan their current work? Can the MCIs run such a service pro®tably?

The desire and the capacity of the poor to save has been overlooked largely becauseit has been discountedÐ it has been assumed not to exist, and very few people havegone looking for it. Those who have (the NGO SDS in the countryside, the


21 Though competition between them is growing fast, especially in villages along the main highways.22 Aid from the twenty-one OECD donors fell 9.3 per cent in real terms in 1995 (Aidwatch, May±June1996).


Cooperative Bank Federal Savings in the town, for example) have had theirexpectations more than met. Their experience, too, shows that such savings can becollected, through collection agents going door to door. The process is di�erent fromthat used by MCIs, but of the same kind.

Deposit takers are more of a public risk than lenders ®rst because they are often netborrowers from the public,24 o�ering the temptation to abscond, and second becausein the case of deposit takers management failure a�ects the public as well as theorganization. Three assurances can be given here. First, it is not the case thatBangladesh's large MCIs, which are very much in the public spotlight, are likely toabscond. Second, well-designed and pro®t-maximizing programmes will requireMCIs to have all but a fraction of their deposits and retained earnings out on loan.For most individual branches the MCI will remain a net lender. Third, the NGOnetworking organization, Credit and Development Forum (CDF)25 is discussing aself-regulatory deposit-guarantee scheme for public protection, and several majordonors have already expressed their willingness to help this process along.

Some MCIs have had histories of poor sta� performance, and this has left deepmemories. ASA, for example, believes that the very in¯exibility and narrowness of itsprogramme that I complain about are responsible for its current very high levels ofsta� honesty. But it not so much simplicity as discipline that is responsible for ASA'simpressive performance. Junior sta� in very remote branches make decisionsinvolving thousands of taka a day, but standard procedures which includes systematicchecks ensure that cash transactions are properly handled and recorded. It needsmerely an extension in scale, not a change of kind, to put in place systems capable ofhandling more ¯exible services. In fact, when the capital resources of the MCI comefrom the immediate locality rather than donor o�ces in Washington, London or evenDhaka, local control will inevitably develop, and can be incorporated into thestructure of local branches, as I have argued elsewhere.26

Part of the success of the Bangladesh MCIs has been the extremely friendlyregulatory environment that has allowed them to charge sensible rates of interest thatsound too high to the ears of regulators in other countries. It is essentially this factorwhich will permit the MCIs to remain pro®table as true intermediaries. FederalSavings pays 12 per cent APR on open-access savings and charges 36 per cent APR onloans, and has shown how even with the ®eld-sta�-to-customer ratios of 1 :100 thatpermit them to collect savings daily the scheme is more pro®table than the Grameen-inspired group schemes that it also runs.

4 FINANCIAL SERVICES FOR THEIR OWN SAKE

The reciprocal lending between family members or friends, the savings-based inter-mediation devices favoured by the poor, and the services of small-time commercial or

12 S. Rutherford

23 As I have pointed out elsewhere (Rutherford, 1995, p. 132), when Professor Yunus of the GrameenBank began his work his aim was to demonstrate to a sceptical world that loans with positive interest ratescould be made to the poor and recovered. It was not to develop a banking service tailored to the needs ofthe poor.24 This has led some writers to argue that MCIs should learn to lend before they take deposits (Jackelenand Rhyne, 1994).25 Director, M. Yahiya, telephone Dhaka 32 66 15.26 Rutherford (1995, pp. 153±176).


semi-commercial providers such as moneylenders, pawnbrokers, deposit-takers, andchit-managers, have at least one important feature in common, which they share withthe few formal providers that o�er genuinely intermediation-based services to thepoor, such as the urban bank mentioned above. These services all address the ®nancialneeds of their users, with little reference to any other purpose. This marks them outfrom most of today's best-known projects o�ering credit to the poor, includingBangladesh's MCIs, which have inherited a very di�erent tradition of concern forwhat is seen as the public good.

Allister McGregor (1991) has pointed out that when the colonial governmentintroduced rural credit projects to Bengal at the close of the nineteenth century itsintentions were moral and didactic rather than ®nancial. It aimed to use credit torescue the poor from the exploitation of the moneylender, to rehabilitate farmers inthe wake of natural disasters, to promote co-operation between villagers, and to teachpeople the virtues of thrift. Similarly, the co-operatives and the state-owned banks ofthe 1950s and '60s aimed to promote modern agricultural technology throughcollective farming or advanced technology, rather than provide rural ®nancial servicesper se. These ambitions entailed assumptions about the ®nancial `needs' of the ruralpoor which were largely untested. The most common were that the poor neededmassive amounts of credit, were exploited by moneylenders, and had a negligiblecapacity to save. To these assumptions was usually added the belief that if the poorcould obtain capital through loans they would be able to bring about sharp increasesin their farming output.

Such projects by and large failed to achieve their aims and failed to reach the poor.Their preoccupation with ends other than the provision of ®nancial services led tosubsidized loans and the need to ration their distribution. The subsidies made themunpro®table and the rationing made them corruptible which in turn made their loansinaccessible to the economically weak. Most such projects have collapsed or havebeen kept alive at the public expense.

Then in the mid 1970s a new type of rural credit project was developed inBangladeshÐ the MCIs with their much more realistic interest rates and much higherlevels of sta� discipline. Their astonishing success made it seem as if the promise of®nancial services for the poor was about to be ful®lled.

But as this paper has shown, as fast as the MCIs did away with indiscipline andprice-induced rationing, they unfortunately created new barriers to full participationby the poor. In part these arose again from a set of non-®nancial aims, some largelyuntested assumptions, and some heroic beliefs. The non-®nancial aims includeold ones like rescuing the poor from moneylenders and `organizing' the poor, andnew ones such as alleviating or even eradicating poverty, and empowering women(Grameen, 1982). The assumptions are the historic favouritesÐ that the poor have aninsatiable appetite for debt and a low propensity to save. The new beliefs are in thepower of group formation and peer pressure to guarantee loan repayment, and thepower of borrowed capital to cause the poor to start up new and small but pro®tableo�-farm businesses.27


27 Stiglitz has pointed out that if capital is all that is needed to make money out of o�-farm ventures in thecountryside one would have expected that capital would have ¯owed in from the cities. That it hasn'tshould make us wonder about the supposed opportunities. See Stiglitz (1989).


The enthusiastic backers of the MCIsÐespecially the international donorsÐhavelargely accepted these aims, beliefs and assumptions. For them, helping to put groupsof poor women into debt has become the preferred way of spending aid moneyearmarked for poverty eradication, small business development and `women indevelopment'. Since donors, directly or indirectly, pay for most of the research onMCI work, the research agenda re¯ects those preoccupations. At a World Banksponsored workshop in Dhaka in early 1995, with the promising general title of`Credit Programs for the Poor', for example, papers were presented on credit andfamily planning, credit and schooling, and credit and nutritional status. There werepapers on the sustainability of the MCIs. But not a single paper looked carefully atwhether borrowers found their loans useful, and none looked at customer preferencesfor ®nancial services.

It is time for us to start looking at the improvement of ®nancial services for thepoor as a worthwhile objective in its own right. Let the next workshop be about theservices themselves. This will mean a new concentration on the basic features of ahigh-quality service for the poorÐ the intermediation of savings into loans,disciplined procedures, the elimination of entrance barriers, lower transaction costs(for both the provider and its customers), and ¯exibility and range of services(Padmanabhan, 1988, pp. 96±108).

REFERENCES

ADB (Asian Development Bank). Alternative Credit Delivery Systems, unpublished Report for

Ministry of Youth and Sports Thana Resource Development and Employment Project

(TRDEP), ADB Dhaka, January 1994.

Aidwatch, no 8 for May and June 1996.

Bouman, F. J. A. (1995). `Rotating and accumulating savings and credit associations:

a development perspective', World Development, 23(3), 371±384.

Fukita, K. (1994). `Toward a long-term strategy for income generation: rural institutions and

resource mobilisation', Mid Term Review of Joint Study on Rural Development Experiment

Project, JSRDE Publication 2, BARD and JICA, Dhaka.

Grameen Bank (1982). Grameen Bank Project in Bangladesh: a Poverty-Focused Rural

Development Programme. Dhaka: Grameen Bank.

Grameen Bank (1995). Annual Report '94. Dhaka: Grameen Bank.

Jackelen, H. R. and Rhyne, E. (1994). `Towards a more market-oriented approach to credit

and savings for the poor', Small Enterprise Development, 2(4), 4±20.

McGregor, J. A. Credit Debt and Morals: An Aspect of the Colonial Inheritance in South Asia.

Unpublished paper, University of Bath.

Maloney, C. and Ahmed, A. B. S. (1988). Rural Savings and Credit in Bangladesh. Dhaka:

University Press.

Maniruzzaman, M. (1993). Bangladesh Observer, Dhaka, 23rd and 24th June.

ODA (Overseas Development Administration) (1995). Self-Help Savings and Loan Groups,

Unpublished Report for the Urban Poverty O�ce, ODA Delhi.

Padmanabhan, K. P. (1988). Rural Credit: Lessons for Rural Bankers and Policy Makers.

London: ITDG.

Rahman, H. Z. and Hossain. M. (eds) (1995). Rethinking Rural Poverty. Dhaka: University

Press.

14 S. Rutherford


Rutherford, S. (1995). ASA, the Biography of an NGO. Dhaka: BRAC Press.

Stiglitz, J. E. (1989). `Rational Peasant, E�cient Institutions, and a Theory of Rural Organ-

ization: Methodological Remarks for Development Economics', in Bardhan, P. (ed.).

The Economic Theory of Agrarian Institutions, Oxford: Clarendon Press.



the savings of the poor: improving financial services in bangladesh

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