Savings for What?

Q: Asset building is still relatively new to many working in microfinance. Can you give readers a quick primer on this concept?

"Lack of income means you don’t get by; lack of assets means you don’t get ahead."

The main idea behind asset building is that anti-poverty and economic development programs - including microfinance initiatives - must include ways for the poor to build assets, not just income. While income is important, it is not sufficient. Without savings and productive assets - a home, land, small business, education and skills, investments, a retirement account - it will be difficult, if not impossible, for the poor to achieve financial security, especially across generations. In a word, lack of income means you don’t get by; lack of assets means you don’t get ahead.

Potential Impacts of Asset Building Improve household stability Create an orientation toward the future Stimulate development of other assets Enable focus and specialization Provide a foundation for risk taking Increase personal efficacy Increase social influence Increase political participation Enhance the welfare of offspring Source: Assets and the Poor, 1991

The concept of asset building was pioneered by Dr. Michael Sherraden in his 1991 book, Assets and the Poor. Sherraden argued that, in addition to the necessity of assets for economic security and opportunity, asset ownership changes the way people think and behave. And these positive changes associated with asset ownership are not necessarily associated with similar flows of income. Think of how you treat the home or car that you own versus the ones that you rent, or how the future orientation and expectations of a child might change if he has a college savings account.

Q: Is asset building really a new idea?

While it might seem rather obvious for many of us reading this interview, asset development is actually a radical idea in anti-poverty debates - which have been dominated by discussions around “income” and “consumption.”

Think about it: around the world, the most accepted poverty measure is defined in terms of income - if you earn or live on less than a dollar-a-day in the developing world, you are considered “poor.” By framing the problem in terms of income, we’ve tried to solve the problem in terms of income - by working to bring the poor up to a certain level of income.

Now, we’re not saying ignore income - but we are saying we should also think about poverty in terms of savings and assets, which until recently has not gotten much attention from practitioners or policymakers. What if we also defined poverty as lacking a certain level of assets for investment or long-term development? If we did so, we would then start to see solutions in terms of assets - a pretty novel idea with huge implications for programming and policy.

Q: Asset building policy has mostly caught on in developed countries. How does it fit into developing country contexts?

As a poverty reduction tool, asset building holds the potential to add value to initiatives aimed at financial inclusion and literacy, sustainable livelihoods, health and education outcomes, and gender equality. But we should be clear about something: the international development field has been doing asset development for a long time. Efforts to help the poor acquire land, livestock, housing, education, skills, savings and other assets are not new. What’s new, we believe, is the coherent framework of asset development - that there are economic and social effects of owning assets not necessarily associated with income, and that defining the problem in terms of assets will get us more solutions in terms of assets.

Q: How has the asset building approach been integrated into the microfinance field?

There are many overlaps between the asset-building and microfinance fields. In particular, savings has started gaining attention within microfinance, discrediting an earlier underlying misconception that the poor cannot and will not save. With studies showing the robust demand for savings, we’re seeing a growing focus on and appreciation for savings and other financial services at the bottom of the pyramid.

"Now, it’s not a question of whether or not the poor can save. Asset building goes beyond issues of access alone to ask the question 'Savings for what?'"

Now, it’s not a question of whether or not the poor can save. Asset building works with micro-savings by moving beyond issues of access to financial services alone (though this in itself is critical), to ask the question “Savings for what?” It also aims to go beyond the role of microfinance institutions by emphasizing the roles of public policy and mainstream financial services in providing sustainable and widespread access to wealth-building financial services. The added value of asset building in microfinance is, in short, to promote savings that lead to productive assets, like an education, a home, land, livestock, micro-enterprise, etc.

Q: What are some examples of asset based programs related to microfinance?

• One of the most exciting initiatives is in Uganda, where New America Foundation Senior Fellow and Columbia University professor Dr. Fred Ssewamala started a pilot for orphaned and vulnerable children. The children each received savings accounts and were offered a 2:1 match on their savings - which were often contributions of family members and friends - to be used for secondary education expenses or to invest in an income generating activity. The savings averaged US$50.52 per participant in a 6-month period or US$8.42 per family in average monthly deposits. With the match, the average participant accumulated US$25.26 per month or US$303 per year. This is a huge amount for a country like Uganda, where annual per capita income is less than US$300.
• In Peru, Edge Finance, S.A. has established an asset building policy targeted at increasing access to savings and financial services for rural women. Through personal savings accounts in regulated financial institutions, deposits by more than 5,000 female participants are rewarded with matching grants. Criteria for matching grants are that participants open a personal saving account, increase their average monthly savings balance, and make productive withdrawals for the purpose of building asset in education, health, housing, or micro-enterprise.
• In Indonesia, the Ministry of Social Welfare has committed funds for a similar pilot project to support individual accounts for saving for micro enterprises, education, and housing (either repair or new purchase).

Most asset building initiatives are generating good economic and social returns, which is largely what makes pilots like these successful and well-received among policymakers, financial institutions and NGOs. Of course, it is important to design policies and programs that adapt to the political, economic and cultural contexts of a given country. However, institutional barriers that limit access to and participation in savings activities remain a challenge to be overcome.

Q: Have you observed any major trends in asset building in the developing world?

Yes, there are many exciting trends in products and strategies that promote asset development. One example is that we’re seeing a major global policy shift towards account-based systems to achieve social policy goals and deliver benefits (e.g., providing pensions through defined contribution such as 401(k) plans instead of a guaranteed payment or traditional pension systems). For example, a number of countries in South America, such as Chile, have reformed their pension systems to account-based systems. Other countries are expected to follow the Chilean example.

This trend is likely to continue, largely because accounts are more flexible and portable in a global economy. While it is an encouraging sign that these accounts can be used to build productive assets, it becomes an even greater priority to ensure that all citizens have the ability to participate in such asset-based policies of the future. This means, as a first step, that the whole population should have accounts and access to basic financial services.

Q: What is the most exciting policy idea coming out of the assets field?

One particularly promising idea is that starting the savings, development and financial education process as early in life as possible is a good thing, such as through child development accounts, or CDAs.

Child Development Accounts (CDAs) CDAs are savings and investment accounts established for children as early as at birth. They are typically restricted after age 18 for post-secondary education and training, buying a first home, starting a small business, and building up a nest-egg for retirement. The idea is to help build up savings and productive assets, promote financial know-how, engender a future orientation, and broaden economic opportunity - especially for children from low-income, low-wealth households.

CDAs are now national policy or being piloted in places as diverse as Canada, the United Kingdom, Puerto Rico, Singapore, Uganda, the U.S., and South Korea. Existing research and successful demonstration efforts suggest that CDAs can increase financial inclusion, promote financial capacity and functioning, protect against economic risks, improve access to education, improve health outcomes and, over the long term, advance livelihoods.

The success of the pilot project with orphaned and vulnerable children in Uganda which I mentioned earlier is a testament to the potential CDAs hold in the developing world. In addition to the economic outcomes already discussed, Dr. Ssewamala also found that children with CDAs have better education and health outcomes than those without CDAs. In particular, there were significant differences in HIV prevention attitudes, educational plans, and child-caregiver relationships.

To learn more about the Global Assets Project and other initiatives like these, visit our website.