savings

 I recently came across a news story from India that I think offers both a couple of cautionary points for regulators regarding deposits, and a few questions for bankers and microfinance practitioners who are thinking about how to expand savings opportunities to more poor households.

First, stick with me while I give a brief rundown of the story. It centers on Sahara India Financial Corp., a non-bank financial institution in India, with more than 42 million depositors. (By comparison, the State Bank of India, the country's largest lender, has 100 million customers). Sahara India Financial is a key property in the empire of Subrata Roy, a magnate whose group holdings are estimated to be worth US$10 billion. Sahara's savings business accomplishes such a reach in large part through its army of hundreds of thousands of agents who go door-to-door in largely rural and poor areas collecting as little as one rupee (about two U.S. cents) per day from its clients to apply to savings plans they hold with Sahara. A number of the products offered by Sahara are commitment savings plans that lock-up client deposits for many months or years, offering them their deposits, plus interest, back at the end of the time period. The appeal of commitment savings plans, which are popular in a number of developing countries, is that it commits people to save, thus enforcing savings discipline. (For a review of commitment savings products in developing countries, see this paper by researchers Nava Ashraf et. al.)

Our newly released report on thrift in the United States has gotten some good play in the media but has also sparked internal and external debate, domestically and internationally, on the importance of savings and thrift relative to credit and consumption. The report advocates a culture of thrift and a renewed focus on savings (as opposed to our current focus on credit and culture of indebtedness). As a team, the Asset Building program promotes these goals and others heavily in our domestic work as well as internationally through the Global Assets Project.

Is there such a thing as a culture of savings? This is a question I have been thinking about for almost a year now since undertaking research into savings accounts for children around the world. Bankers in countries from Sri Lanka to Papua New Guinea to Kenya told me in interviews that their banks are offering child savings accounts (CSAs) with an intention of "inculcating" a habit of savings among young people, or "nurturing" a savings culture. (Of course, these banks are primarily offering the accounts to attract and retain young customers, who will hopefully build their balances as they grow older).

In one conversation, a banker in Sri Lanka told me that Asians are more thrifty than people elsewhere. "We tend to save a lot," a tendency that he said was inculcated into the country's children. Conversely, an executive at an international children's charity told me that Ethiopia, where the charity recently started a child savings program, doesn't have a very strong savings culture. In Ethiopia, the executive said, the people that save, save primarily for death (i.e. through burial societies). Moreover, a banking executive at a multinational bank that operates in the South Pacific told me, in part because of a hot and humid environment, there is no such thing as a habit of savings in the region. If you get something today, you better consume it today, the executive said of the mentality there.

 I've recently been thinking about the similarities between our national epidemics of obesity and financial illiteracy. Both are socio-cultural phenomena created through generations of misinformation, misunderstanding and perverse incentives.  Factors like (but not limited to) easy credit and encouraged consumerism without proper consumer disclosure and easy access to abundant, cheap astonishingly unhealthy foods has created a culture of overindulgence on so many levels. Both problems tend to fall disproportionately on poor, low and even some moderate-income households, which lack easy access to alternative options (like banks red-lining disadvantaged neighborhoods; public school cafeterias serving french fries most everyday yet not offering physical education classes). And both are believed to have huge social and economic costs that are now reaching epic proportions.  If similar forces are causing and/or driving these problems, then shouldn't efforts to tackle both childhood obesity and financial illiteracy also be similar?  Only recently has this become apparent to those fighting the battle of such rhetorical bulges.

The tax code is a mess. Even those pointy-headed economists that can bicker about anything (except the gas tax) agree that it is too complicated. They cry in virtual unison that the growth of tax deductions, credits, and deferrals leads to inefficiencies and market distortions (yikes!).

To confirm these fears, we need look no further than the education arena. Do you know how many tax provisions there are designed to support post secondary education and workforce training? It's a long list.

There are tax breaks for contributions to specific accounts and savings plans such as Coverdell education savings accounts, section 529 college savings plans, pre-paid tuition plans, and penalty-free withdrawals from IRAs. Further, there are other tax breaks that cover the treatment of educational expenses. These include the Hope Credit, Lifetime Learning Credit, deduction for tuition and fees, and the deduction for interest on student loans. So, that's a count of at least 8.

Many of these overlap and as such they cause a great deal confusion among consumers. Last week the House Ways and Means Commitee held a hearing on this topic and I sent in some testimony that offered my take on the matter.

I consider my cell phone an asset. With all those hi-tech capabilities packed into a little handset, it keeps me simultaneously connected, productive, on-time, en route, entertained and informed. And I'm not alone - more than 3 billion people around the world (almost half of the global population) have a cell phone. But what if this gadget that seems capable of reaching almost anybody and doing almost anything could also provide a mechanism for savings and asset building for individuals around the world? Despite seemingly limitless potential and enthusiasm for such an innovation, it will unfortunately be some time before this is a reality.