How we get there

An important distinction that is being made recently is the difference between saving up and saving down. Saving up is the accumulation of wealth or valuable materials that can be used to produce a valuable final product or service, such as building a new home, financing a child's schooling, etc. Saving down is borrowing money to finance large costs such as buying land, food, or business equipment. The point is being made by some is that microloans only address half of the equation, and that broader microfinance institutions must be created to address both ends of this equation, allowing them to save and accumulate assets.

Grameen Bank and two other large microfinance institutions in Bangladesh found that for every $1 they lent to clients to finance microbusinesses, about $2.50 came from other sources, mostly clients' savings. This is important, because recent studies have found that informal methods of savings are very unsafe. For example, a study by Write and Mutesaria in Uganda found that those who saved in the informal sector lost around one quarter of the money put in. Microfinance is moving away from focusing only on lending and are helping the poor save as well. This is the difference between microcredit and true microfinance.

There are four different categories of microfinance providers that must all be engaged in any attempt to develop a system-wide approach for microfinance:

• Informal Financial Service Providers: Examples of these include moneylenders, pawnbrokers, savings collectors, money-guards, ROSCAs, ASCAs, and input supply shops. These tend to offer very flexible, convenient, and fast services, but are also very costly and are at times viewed as predatory. The financial product choices are often limited and very short-term.
• Member-Owned Organizations: These include self-help groups, credit unions, and organizations such as CVECAs. These are also typically small and local, allowing them to be flexible and convenient. They have low costs of operation because they are operated by the poor. The providers tend to have little financial skill, however, and they may fail if the economy turns or their operations become too complex. They can become easily compromised if they are not effectively regulated and supervised with one or two influential leaders taking advantage of the group.
• NGOs: As of the end of 2005, there were 3,133 microcredit NGOs lending to about 113 million clients. These institutions have managed to make lending to the poor a profitable enterprise.
• Formal Financial Institutions: These include commercial banks, state banks, agricultural development banks, savings banks, rural banks, and non-bank financial institutions. These institutions are regulated and supervised, offer a wider range of financial services, and control a branch that network that can extend across the country and internationally. They tend to not adopt social missions, however, and so often do not deliver services to the poor due to higher operational costs.

Each of these four types of institutions need to be integrated to solve the microfinance problem. For example, efforts are being made to connect self-help groups to commercial banks to network member-owned organizations to create a scale large enough for commercial banks. There are also efforts to help commercial banks be more profitable at lower scales by integrating mobile banking and e-payment technologies into their branch networks. A lot of this is likely to involve local groups building institutions with NGOs and former financial institutions providing the technical assistance and connections to the rest of the global economy.