A review of the importance of savings in rural financial markets of developing countries

Abstract

Much of rural finance policy until the end of the 1980s was based on the faulty premises that the poor in developing countries are neither creditworthy nor able to save. As a result, governments in establishing agricultural credit programmes with their own or external funds, paid little attention to the mobilization of internal savings and the provision of subsidized and easily accessible credit constituted the central theme of agricultural development strategies. The new financial market development approach to finance stresses the provision of both farm and non-farm rural lending services as well as essential savings deposit facilities. Savings accumulated by the poor are useful for self-financing of investments, emergencies and consumption-smoothing, while savings mobilized by financial institutions are the main source of growth of funds and bring independence from external subsidies and interference. This paper focuses on the importance of savings in rural finance in the context of its usefulness both for poor rural households and microfinance institutions. The measures for improving access to, and interest in, savings deposit services are also discussed, particularly in the light of new findings that the demand for financial services at the rural level clearly emphasizes deposits and savings and that it is difficult to imagine a development bank surviving on a self-sustaining basis through responsible loan recovery without a savers’ constituency built on local deposits.

Keywords: savings, importance, rural poor, microfinance institutions, improved access.