I’m attending the Microfinance Impact and Innovation Conference, and Abhijit Banerjee is presenting his Miracle of Microfinance?.
I’d seen versions of the paper before, but there is one new bit (or a bit I missed the first time) that I found insightful:
Microcredit can act like “savings in reverse”: the household obtains the loan principal in a large sum, which can be invested, and then group and lender pressure to make regular loan repayments every week provides discipline that may make resisting temptation (tea, cigarettes, etc.) or requests for money from other family members or friends easier.
Not only do they find just this, but that the money not spent on alcohol, tobacco, gambling, and food was spent (in part) on durable goods used in a household business.
The absolute effect is relatively small, but in relative terms quite large: an increase of 20% relative to usual spending on durables.
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As others have noted, this isn’t a new idea. It may seem surprising that people take credit in order to save, but Stuart Rutherford coined the phrase “saving down” I believe in 1991. But it has gained more traction lately, and there are lots who suggest that microfinance can act as a commitment mechanism, or prevent temptation goods. Ashraf, Karlan and Yin (2006) have a paper that runs an experiment in the Phillipines and Dupas and Robinson (2010) have a savings RCT in Kenya.
Rutherford in “Portfolios of the Poor” restates this idea by calling loans “accelerators” in the process of obtaining lump sums of money. Chapter 4, p. 110 “If you’re poor, borrowing can be the quickest way to save.”
Jonathan Morduch presented a paper in the ASSA meeting titled Borrowing to Save–sort of borrowing an idea from Stuart Rutherford of “The Poor and their Money” fame.
Stuart Rutheford, Rich Rosenberg and others have been writing about this for years. I believe the term they use is a “usefully large sum” of money. Susu collectors also offer a negative interest rate savings account.