Microfinance dreams

The microcredit dream involved using loans to solve poverty. But, the dream eventually proved to incorporate serious misconceptions: that most borrowers could become successful entrepreneurs; that new businesses were easy to start and sustain; that poor borrowers had many attractive investment opportunities; that most loans were used in income-producing investments; that borrowing did not add to the borrower’s risks; and that microlending was inexpensive. Eventually, many microloans were used to deal with immediate risks facing the household, rather than to build income streams. Nonetheless, microlending revealed that many poor people had significant capacities to borrow and repay loans, and that borrowing made their lives less difficult. Recent successes in mobilizing savings indicate that poor people also may have surprisingly large capacities to save, thereby fostering a microsaving dream. The paper compares the strengths and weaknesses of two popular models used to promote savings: the savings-group model, first used in Africa, and the self-help-group model widely used in Asia. The savings-group model offers savers more attractive features than does the self-help-group model. Savings groups offer balanced menus of financial services, and, while neither loans nor savings are cures for poverty, both can significantly ease the plight of the poor.