Gates Foundation to Spend $500 Million to Help Create Savings Systems for the World’s Poor

The Bill and Melinda Gates Foundation announced today it would spend $500 million over five years to help develop institutions that enable the poor to open savings accounts. The program to encourage financial inclusion targets the two fifths of the people in the world who earn less than $2 a day. These poor arent served by current banks either because they lack locations in rural areas or because they have minimum deposit requirements that exclude most poor people.

The poor need to save and they do save, said Melinda Gates, speaking at a savings forum that included central bankers, Telco operators, scholars and regulars. But they dont have a safe or efficient way of doing the savings. Gates pointed out that many people have to take 3-hour bus rides to the city to deposit money. Others dig holes in their backyards to put their money.

The push for microsavings follows in the footsteps of the successful development of microcredit institutions that provide small loans, making it possible for entrepreneurs in the poorest areas of the world to launch businesses. Seattle has become a major innovator in the arena of developing new approaches to microcredit with such institutions as Global Partnerships, which focuses on providing credit to microfinance institutions in Latin America.

The high cost of establishing savings accounts and handling transactions for people with small sums of money has been a major obstacle to develop a system that would allow the poor to save. Yet the poor need savings accounts to set aside money for everything from buying seed to paying for their childrens education.

Sheldon Garon, a Princeton University Professor who has written extensively about savings, points out that in Japan and many places in Europe, postal savings systems played a key role in helping poor people establish savings accounts. That approach hasn’t worked in places like Africa that don’t have extensive postal systems and where corruption remains a problem.

But the development of a system in Kenya that allows laborers in the city to transmit money to their families in rural areas using cell phones, has built optimism over the potential for technology to create low cost systems to encourage savings. Cell phones enable people to buy and sell minutes through the telecommunications company, a trusted entity.

Gates recalls her excitement after watching Kenya’s cell phone savings system in action for the first time. She went home to tell her husband, Bill, that the prediction he made of a cashless society in his book The Road Ahead might happen first in Kenya.

There are more than a few obstacles to fulfilling that vision. One regulator mentioned the challenges of having to work around regulations designed to prevent money laundering and the financing of terrorism. One approach is to reduce regulatory control over small transactions. Another approach is to automatically approve transactions that are used for specific, well-understood purposes such as government payments to the poor.

Njuguna Ndungu, governor of the central bank of Kenya, said that Africa has seen progress in recent decades as important institutions for development have been put in place. He says many banks in Kenya require a minimum balance of $125, an amount few people in the country can afford. Thanks to the new cell phone system, he said there are now 2.5 million micro accounts. He said farmers with savings accounts spent more money on fertilizer and saw their earnings from crops increase by as much as 50 percent.

The demonstration effect that this can work, that it can be trusted and can move to a higher level is very powerful. We are very comfortable with how its working, Ndungu said.

Yongbeom Kim, Director General of Global Financial Architectures Bureau in the presidential committee of the G-20 said that one of the important accomplishments of the recent G-2- summit was recognition of the importance of encouraging financial inclusion as a way of promoting economic development.

But the importance of savings, all participants agreed, is that it encourages the poor to start thinking about and planning for the future.