An unoriginal thrust of my work is that savings is probably a better service for poor people than credit. You can get in big trouble with borrowing but it's hard to imagine getting in trouble by saving too much.Except actually it's not so hard. Lots of people have lost savings they put in banks. Here's what I just wrote in my draft chapter 9 (not public yet):
Propriety will not always prevail at microsavings institutions: some deposits will disappear. (A World Bank report on postal savings banks delicately explained that, “In some countries, mainly in Africa,...deposits have not been managed with transparency and are transformed into substantial unfunded liabilities.”) Sometimes the cancer of corruption will grow on the lending side instead, sending deposits into the pockets of cronies who won’t pay back. Or an economic crisis will turn many good loans bad, bringing the bank to its knees. Or the government will pay its debts by printing money, causing inflation that erodes the value of savings. Then there is the problem of bank runs, like those that fed the Great Depression [as Daniel Rozas commented]. Doubts about the soundness of a bank become self-fulfilling as depositors line up to withdraw their money---and the bank cannot call in its loans as fast.
So it is important to assure that savings are safe. One institution that has been devised for this purpose is deposit insurance. The first instance was in the United States in 1933. Deposit insurance can be seen as doing three things:
- Insuring depositors against the risk of loss of savings in all the ways listed above.
- Stabilizing banks by blocking the vicious cycle of the bank run.
- Creating a new agent for prudential oversight of banks.
Writing this weekend, it occurred to me that I need to advocate not just for savings, but for safe savings. Having already proposed the international-level replication of one common domestic institution, the credit bureau, I thought: why not do the same with deposit insurance? Why don't promoters of microfinance set up a microdeposit insurance scheme to cover MFIs in countries where such insurance is not available domestically? This would protect poor savers against all the risks above except perhaps hyperinflation. (Commenter Oscar thought the same thing.)The major concern I see about the idea is that the insurance fund would be on the hook for losses stemming from operations beyond its control. Here in the U.S. the Federal Deposit Insurance Corporation can take over failed banks and liquidate them in a way that minimizes costs for the taxpayer. (I just witnessed this as a saver.) And I assume the FDIC exacts a quid-pro-quo in exchange for its insurance: banks may need to follow certain rules to carry FDIC coverage. But an international microdeposit insurer would lack such power to control the risks it assumes, to prevent "moral hazard."This problem does not seem insurmountable. Deciding whether to insure microsavings is not so different from deciding whether to invest in microlending. Both raise questions about the quality of lending operation and the veracity of financial statements. In fact, the ratings agencies (MicroRate, PlaNet Finance, M-CRIL) could support insurance of microsavings much as they do investment in microcredit.Seem reasonable? Has anything been written about this before?
