Improving rural financial markets : appropriate design of savings projects

In the past, programs for developing rural financial markets have focused more on providing credit -- often at cheap rates -- than on stimulating rural savings deposits. However, savings mobilization is becoming increasingly recognized for the important role it plays in the development of rural financial markets and in promoting broader development goals in the Third World. The workings of savings and credit projects are an important concern of the ARIES project, since many resource institutions serve small-scale enterprises in rural areas through the provision of credit. This working paper is intended to stimulate discussion on the key issues in the design of rural credit and savings programs and offers guidelines for planners. It outlays four criteria for successful joint savings and credit projects: (1) access and distribution to intended clients; (2) savings mobilization; (3) loan recovery; and (4) economic efficiency. Beliefs and practices that determine the degree of dependence upon donors, appropriate interest rate structures, the packaging of savings services, and institutional choice affect the capacity for programs to meet these four criteria. Chapter 1 demonstrates how the "too-poor-to-save" belief constrains rural saving and indicates how credit projects in the past have blocked savings mobilization through inappropriately low interest rates and dependence on external financing. Secondly, it clarifies the previously disguised direct and indirect benefits of generating rural savings. Moreover, it poses the critical questions that project designers should ask in developing successful savings mobilization projects. Chapter 2 assesses the extent to which different types of institutions can meet the criteria for successful savings projects detailed in Chapter l. The discussion uses the concept of comparative advantage to point out which organizations tend to achieve or fail to meet certain features of good savings projects and why. Chapter 3 maps the policy considerations that project planners should address in project design. Government policies both directly and indirectly influence an intermediary organization"s ability to achieve the criteria necessary for good savings projects. The recommendations given can serve as a guide for project planners in structuring incentives for savings generation, making the organizational choices for savings projects, and in making project choices in the face of policy constraints. (Author abstract)