Why Do They Spend What They Don’t Have?

I grew up with a piggy bank. My generation was told by parents that it is important to save “for bad times”.  When bad times never came and I grew up I started to get a different idea of saving and the value of money. Yet I never considered credit except for buying a home. This one belief is hard to change: “Don’t spend what you don’t have.”

Yet the business model of microfinance institutions (MFIs) is based on the wish of people to spend what they don’t have and then pay back over a period of time.

I’ve asked a couple of colleagues why customers queue up to get indebted. Here are their answers:

  • Because a sudden big expense item came up
  • Because whatever people manage to save will be claimed by relatives. Debt repayment is a good enough reason not to share cash with relatives.
  • Because they have a great idea for business but not enough money
  • Because they think money will help them become successful
  • Because they have a solid business but their cash management skills are not good enough to prepare for the next growth or tourist season.
  • Because the conditions are favorable and/or the loan is easy enough to pay back
  • Because a loan is one of a few ways to cash in on informally owned property without selling it

The largest MFIs on the planet have several million borrowers, all obviously inclined to spend first and pay later. There are obviously some good and some less good reasons to borrow. Some people need a little nudge to consider credit:

The acceptance of debt into the household as part of a “normal” and “decent” lifestyle required an active redefinition of what it meant to use credit – the emergence of a new, positive narrative.

(from governance across borders)

As most loans are paid back, the more appropriate question would be “why do they spend (at a time) when they don’t have?”

The global development community has identified credit as a potential source of indebtedness and is now promoting savings for low-income people. And MFIs are realizing that the money they raise on the financial market has a high prize and seek alternative sources to become economically more sustainable.

Let’s look at an example: if raising money costs 15% and loan interest rate is 25% then the margin is 10%. This has to cover all expenses and losses. If we were able to raise savings at 5% we could either reduce the loan interest rate or invest more in business development.

FINCA Tanzania CEO tells me: “We are not focusing on poverty nor are we driven by a need to optimize profits. We asked clients how we can serve them better and they mentioned savings accounts.” With the banking license FINCA Microfinance Bank is now good to go for savings and delight their customers.

I asked a Savings Sales person how things are going. “It’s actually not difficult to raise awareness for the new FINCA product” he says. “People have traditionally had a wooden box at home where they placed small amounts every day. Whenever they needed to make a large purchase they rummaged through the box to see what’s there. Saving with FINCA works the same way. ”

Let’s hope the savings accounts will have an impact both on FINCA Tanzania and on their clients. While the global experience with microcredit is a bit jaded maybe savings can play a role in lifting additional people out of poverty.

(photo by SuSanA Secretariat on flickr)

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