Giving a Lot for Saving a Little
Gates Foundation to Invest in Programs to
Help Collect Deposits for the World's Poor
By ROBERT A. GUTH
July 31, 2008; Page A11
The idea that small loans can awaken an entrepreneurial spirit among the world's poor won a Bangladeshi economist the Nobel Peace Prize in 2006 and released a flood of money into thousands of "microcredit" programs on the bet that the poor are good borrowers.
Now, the world's largest private philanthropy is betting that they are also good savers.
The Bill and Melinda Gates Foundation plans to donate hundreds of millions of dollars over the next few years to programs designed to spur savings in poor countries, officials at the Seattle foundation say. It is the philanthropy's first focused effort in financial services and is part of a broader push by the foundation into programs to help improve basic infrastructure in the neediest regions of developing countries.
"We're going to focus very heavily on using our resources and our voice to put savings back on the world agenda," said Bob Christen, director of financial services for the poor at the Gates foundation.
The bet on saving, which has become an important measure of the health of developed economies, is based on the belief that there is widespread, unmet demand for savings programs even in poverty-stricken areas. Savings are already a fundamental part of many developing societies, in the form of physical assets; poor people world-wide store their wealth for future use by keeping livestock, hoarding coffee and buying jewelry.
In some countries, the needy appear ready for more. Six banks focused on the poor -- in the Philippines, Thailand, Indonesia, Benin, Uganda and Colombia -- found that demand for savings accounts outstripped demand for loans by a six-to-one ratio, according to a 2006 study by the Consultative Group to Assist the Poor, a World Bank-backed think tank that advised the Gates foundation on its financial-services strategy.
But while there are some early success stories in collecting deposits from the poor, in Indonesia, Bangladesh and elsewhere, the complexity and cost of delivering banking services in developing countries make the venture rife with challenges. Among them are strict banking regulations governing which organizations are allowed to hold people's deposits and the lack of bank branches in rural areas that would allow customers convenient access to accounts.
"It's a more complex issue when you start to unpeel it," said Jim Bunch, director of investments at philanthropy Omidyar Network, which has invested about $105 million in microfinance organizations, some of which in recent years expanded into savings, insurance and other noncredit products.
The effort also could lead the Gates foundation to forge ties with telecommunications operators, banks and retailers, all organizations with which philanthropists typically have had limited connections for reasons ranging from the pragmatic to the ethical. Says Mr. Christen: "It's a new world for foundations in general."
That concerns some in the microcredit movement, which is embroiled in a debate over two opposing philosophies. Some believe that financial services for the poor should direct any profits back into services for the needy. The Gates plan is a nod to the other side of the debate, which holds that commercial enterprises -- banks and other profit-seeking businesses -- can best serve the broadest swath of people by using tools such as capital markets to fund expansion.
The theme that the world's poor deserve better financial services is now a central plank of development in poor parts of the world, largely thanks to Muhammad Yunus, an economist who won the 2006 Nobel Peace Prize for small-loan programs he started in Bangladesh 30 years ago that have spread around the globe. His work helped to spark a boom in microcredit as businesses, governments and individuals in the rich world ponied up huge sums for new loan programs around the globe. In Silicon Valley, entrepreneurs started a Web site, Kiva.org, that lets individuals make small loans to poor entrepreneurs. Actress Natalie Portman lent her name to the microfinance group Finca International.
The Gates foundation's decision to enter the field is an example of what likely will be a range of new programs as Bill Gates begins working full time at the foundation, which has an endowment of $35.9 billion. The finance work is part of an expansion the foundation made two years ago into global development that includes investments to help small farms.
The foundation's efforts could have a broad impact on microfinance, which to date is largely focused on microcredit, not savings. By applying its considerable weight in an area, the Gates foundation has the power to draw people, new ideas and fresh money.
The foundation tested the microfinance waters through investments of about $300 million over several years in a range of services, including loans and insurance. A review of those programs and a broader study this year persuaded foundation officials to aim predominantly at savings, Gates officials say.
The foundation hopes to make early progress in countries including Brazil, the Philippines, Mexico, South Africa and India, which have much of the infrastructure needed for establishing savings programs, Mr. Christen says. Ultimately, though, he expects the foundation to focus a "significant portion of our funds" in Africa.
The Gates foundation in June completed an $11.7 million grant to Oxfam International to start training programs and group-savings programs, mainly in Mali and Cambodia, a foundation spokeswoman said. The foundation is considering similar grants to two other nonprofit organizations, she said.
The strategy comes as the microcredit movement is attracting questions about whether the small loans actually help to alleviate poverty. Many recipients of microloans build sustainable small businesses with their borrowings, and their success stories abound. But some borrowers use their funds for consumption and in other ways that help smooth the volatility of daily life in the short term but may do little to elevate their living standard. Mr. Christen acknowledges that the impact of savings is hard to measure.
The first challenge, though, is finding ways to offer accounts at a low cost. Since each transaction will likely be a small amount of money, the cost per transaction to the bank and the depositor has to be negligible. And many of the poorest people are in rural areas too far for banks to reach. The trick will be to extend the concept of the bank branch to local stores, kiosks, post offices or even cellular phones.
The Gates foundation's funding will go to grantees with plans to set up rural savings programs and to research, as well as to training and new technologies. It will also go to educational programs for central bankers and other ways of "encouraging" governments to make regulatory changes needed to open savings to a broader group of people, foundation officials say.
There are models, including a service called M-Pesa run by mobile operator Vodafone Group PLC, that allows Kenyans to use their cellphones to deposit and withdraw through a network of thousands of local stores. Still, "it's going to be tough to get downmarket with savings products, because the math doesn't work very well," Mr. Christen said.
The promise and problems are clear in Malawi, where the nonprofit group Opportunity International holds $15 million in 150,000 accounts in a banking system for the poor. The organization uses armored trucks equipped with ATMs that travel to rural areas where the bank doesn't have branches or kiosks.
The bank is profitable and growing but is limited by the cost of reaching the rural poor, said Francis Pelekamoyo, board chairman of the group's Malawi bank. The trucks, laden with satellite, computer and security technology, cost $250,000, and the bank runs each of its new clients through an eight-lesson training course on financial products.
"It's very expensive to introduce financial services to someone for the first time," Mr. Pelekamoyo said. With more funding, he said, "I would go deeper into rural areas."
Write to Robert A. Guth at email@example.com