A different road out of poverty: saving instead of borrowing

Microloans get all the publicity, but the key to upward mobility for the world's poor may be to rely on simple savings plans, which offer a debt-free way to build wealth, make investments, and better one's life.

The global poor already prefer savings to loans, but add in an additional monetary incentive to save and piggy banks begin to fill even faster.

After years of hype about microlending being the key to upward economic mobility for the world's poor, relying on simple savings may seem like a set-back. But savings can be a debt-free way to build wealth, make investments, and better one's life.

And the best news is that no amount is too small when it comes to savings. Every penny counts, especially when a percent of those pennies saved is matched and awarded to the saver.

This reward incentive is one aspect of the Global Outreach Alliance’s microsavings program. GOA is a volunteer-driven nonprofit implementing sustainable development solutions in Cambodia, Kenya, Israel, Tibet, and Uganda.

GOA’s microsavings program in Kenya is successful because it:

• Provides incentives. A family chooses how much they want to save each week for a 10-week-long period. After they complete the 10-week phase, GOA rewards the successful savers with 10 percent interest. A dollar saved becomes worth more than a dollar spent.

• Offers a no-risk, debt-free solution. With news of microlending clients defaulting on loans at alarming rates in recent years, savings can be a safer way to make investments, send a child to school, and improve quality of life overall.

Debt amplifies clients' vulnerability and can further impoverish borrowers if they fail to make payments resulting in late fees, asset seizures, and a loss of good credit. Therefore, not everyone will benefit from borrowing money, but all can benefit from savings.

The risk that credit entails may be part of the reason why research finds that when savings and loans are both offered, people chose savings over loans at rates of up to 12:1.

In response to clients' desires, many institutions that were making microloans are now adding microsavings to their offerings. Some institutions have even stopped lending money altogether.

• Generates income.

Microloans are not the only option for those wanting to be entrepreneurs. The money saved plus the interest added in can be re-invested toward micro-enterprises, such as a poultry farm, soap-making, or a food stand. The GOA-Kenya team is also set up to consult savers on their micro-enterprise investments.

• Is more than a one-time deal. After GOA's first 10-week savings phase, the saver is given the chance to complete another 10-week cycle. In fact, savers can repeat the process up to 10 cycles of savings with the added interest reward at the end of each cycle.

But not all organizations with microsavings programs can provide the 10 percent interest that GOA achieves, which relies heavily on donations. Some, such as formal savings circles and mobile-phone deposits, provide other incentives, like having a community-support system or the ability to access formal savings even when living in isolated regions.

"Savings doesn’t just help people mitigate the risks posed by a medical emergency or a bad crop,” Melinda Gates said at the 2010 Global Savings Forum, where she and Bill Gates pledged $500 million to expand savings. “It also gives them the ability to marshal their resources to build something better for themselves and their children. It allows them to fund their own businesses, to look ahead with confidence. Savings helps families to take the giant leap from reacting to events to planning for a healthier, happier future."