The Relative Risks to the Savings of Poor People

• by Leonard Mutesasira and Graham Wright
• Feb 2, 2002
• 2 min
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The study is based on qualitative and quantitative research to assess risks involved in saving informally as compared to saving through institutions in semi-formal and the formal sector in Uganda.

Microfinance Institutions presently are not allowed to mobilse savings as per RBI specifications. The scepticism is grounded in two major arguments. One that MFIs would pose systemic risk due to their large scale operations, given that they might default; and second, that depositors would not be entirely safe, given the weaknesses of internal management and control systems in these institutions. As far as the former is concerned, MFIs presently do not have the penetration to pose systemic risk.

MicroSave carried out a qualitative and quantitative research in partnership with other the institutions in in Uganda to assess the relative risks involved in saving informally as compared to saving through institutions in the semi-formal and the formal sector. The research led to the conclusion that large scale erosion of savings presently taking place due to the poor saving informally, i.e. in kind for lack of any option, can be avoided if they are given the option of saving through the MFIs. The research revealed:

• 99% of clients saving in the informal sector reported loss of savings, mainly due to saving-in-kind
• 15% of those saving in the formal sector also reported loss of savings which was primarily due a cooperative bank closing
• 26% reported lost savings in the semi-formal sector which was primarily due to group lending mechanisms being preferred.

The findings establish that absolute deposit protection is never possible even in the formal sector. However, 99% losses occurring due to the poor saving informally can be avoided if they are given the option of saving through the MFIs.  Detailed findings of the research can be read in this thought-provoking paper.