Stuart Rutherford, author of “The Poor and Their Money,” answers 5 common questions asked about savings and the poor. This article is part one in a four-part series on savings. More expert Q&As on savings can be found on the Savings Information Resource Center at www.cgap.org/savings or by clicking on the links at the left.
Q: Aren't poor people too poor to save?
Rutherford: Too poor to save, too poor not to save, that’s the paradox that faces many poor and very poor people. If you’re poor, your income is not just small, it’s probably irregular and unreliable as well. Most of it is quickly spent on essentials. The result is that when you need to buy anything other than essentials (and sometimes even essentials), you just don’t have the cash to do so. If you can't buy a course of antibiotics or clothes from current income, you must find a way to buy it from past income or future income – that means using financial services and devices. The best way to access past income is withdrawing savings; and the best way of accessing future income is by taking a loan – and loans are nothing more than advances against future savings.
Because poor people find themselves more often in this situation than the better-off, it can be argued that the poor’s need for financial services is greater. The poor know this, and it is reflected in their behavior. Most poor households, even those closest to the breadline, actively seek ways to manage savings. They save at home in earthen piggy-banks. They hand money to their neighbors and friends. They join all sorts of savings clubs, and pool savings through other reciprocal traditions of interest-free borrowing and lending.
Q: How do you know that they want to save?
Rutherford: By what they tell me and by observing their behavior. My work has taken me, over the last twenty-five years, to the slums and villages of twenty countries on three continents. I have talked to poor people casually, sitting in their homes and workplaces, in ad-hoc groups, in more structured groups, or through carefully designed research exercises such as the “financial diaries” project in which we build up a detailed understanding of personal financial portfolios through frequent, repeated visits to carefully selected respondents. Not every poor person saves, but it is uncommon to find many who don’t want to: their understanding is too acute to leave them unaware of the importance of saving. The financial diaries done in Bangladesh show this. Even the poorest households in the sample had some means, however fragile, of storing some cash against future needs.
Q: What, if anything, prevents them from saving?
Rutherford: 
Lack of means constrains the quantity of savings they can make, but lack of opportunity is the biggest constraint on their ability to save at all. The two are connected, since a low savings capacity shuts off many savings opportunities. Those with the smallest sums to save are the least able to afford the cost of savings such as transportation, minimum deposit rules, periodic account fees, and charges for withdrawals. Cash stored at home can be stolen, blown away in cyclones, or eroded by trivial day-to-day spending. The poorer you are, the less likely you are to be invited to join a well-run savings club. The smaller your savings, the greater the chance that your moneyguard will swallow your savings with impunity, and the harder you will find it to recover cash from a debtor. These difficulties are compounded by the fact that the poor need to save locally and frequently. A simple savings deduction from a monthly salary is not feasible for them. The keywords for good savings services for poor people are proximity, flexibility (in deposit value and timing), frequency and reliability.
Q: We've heard that some poor people pay others to hold on to their money for them. Why would they do that?
Rutherford: So do you, probably. If you hold a current (or “checking”) account at a bank, you probably receive no interest but pay fees of one sort or another. You tolerate this cost because it would be inconvenient to have to keep the money at home, and unwieldy to keep small amounts locked up in a savings account.
Q: Where I can find evidence that the poor save?
Rutherford: Here are four examples of research that I have been involved in. All of them provide evidence of the many ways that poor people save, or seek to do so.
- Financial landscape: Based on close field-level research into the financial behavior of poor people, these studies tend to reveal complex and intensive financial behaviors. The particular services and devices in use show strong local or regional variation, but fall into categories that are universal. (Read examples here.)
- Financial diaries: Completed in Bangladesh and India, and in progress in South Africa, these exercises use intensive field-level research to construct “diaries” of the financial behavior of selected samples of very poor, poor and near-poor households. They too tend to show the rich and complex financial lives of the poor and to illuminate the mix of saving and borrowing services commonly used by the poor. (See references here.)
- MFI databases: With more MFIs using computers to track client transactions, the wealth of electronic evidence of savings trends and volumes among poor people is growing rapidly. For example, SafeSave’s daily transaction records for its 10,000 clients in Dhaka’s slums over seven years are now being studied at the Asian Development Bank Institute in Tokyo. Associated fieldwork is about to begin which will add household-level demographic and economic data, allowing researchers to measure client responses to changes in products and prices, and to track shifting preferences between saving and loan instruments. (See references here.)
- Grameen II: A live experiment of massive scale is going on now in the villages of Bangladesh. Grameen, in its “second phase” has, since 2002, been massively shifting its product mix to favor more, and more flexible, savings instruments for its members. Given that Grameen was famously identified for so long as a microcredit specialist, their move to savings offers a good opportunity to research the reactions of their millions of clients to these new savings services – and one such study has already produced an interim report. (Read report here.)