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India: Microcredit and savings

Rethinking microcredit: borrowing as a disciplined way to save?

The Nobel Peace Prize celebrated the potential of microcredit to unleash the productive potential of small-scale entrepreneurs in need of small loans. Research from rural India suggests that women who are less able to discipline themselves in their financial behavior may voluntarily use microcredit as a saving tool. A loan can be used as a means of saving for lumpy expenses, such as education for their children or house repair. If so, there is cause for rethinking microfinance and focusing on microsavings that would enable the poor to manage their money at less expense.

Michal Bauer / Charles University and CERGE-EI
Julie Chytilová / Charles University
Jonathan Morduch / New York University

where: India
sample size: 573 subjects
when: June 2007

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Česká katolická charitaCERGE-EIFulbright FoundationGlobal Development NetworkIES FSV UKRenomia

A gym for self-discipline

Do you remember the last time one of your friends said that she was smoking her last cigarette but then she lit one the very next day? And do you remember your New Year’s resolutions about exercising regularly? The poor living in developing countries all over the world experience similar problems in their daily lives. Many of them would like to save some money for the future to fulfill their goals. But if the only option is to save at home where money is permanently available for spending, it is extremely hard to resist temptations and people tend to overspend. The emergence of informal savings products such as rotating savings associations or deposit collectors demonstrates that the poor are not only willing to save but also to pay for it. These financial tools incorporate specific features: frequent, regular, small deposits or saving in a group, which support individuals with self-discipline problems. The features of these savings products and those of microcredit are remarkably similar (see the figure).

Less now or more later?

The researchers measured self-control difficulties of the poor in rural India and linked it to their financial decisions. One of the key questions of the study is how people perceive the value of current and future money. Would they rather receive a smaller amount tomorrow or a larger amount in three months? Are people patient enough to wait for a higher reward? And would they choose the same smaller amount 12 months from now or the larger one in 15 months? In the real life people often have self-control difficulties and tend to be much more impatient in current choices, but patient in the future ones, in economic terms they have hyperbolic preferences. The design of the study allows to identify individuals who exhibit such type of preferences and to test whether their financial behavior differs from behavior of people without self-control difficulties.

Tying hands to save

Although the subjects consisted of men and women, the researchers found much stronger results for women. Women with hyperbolic preferences save less than women without self-control difficulties. These women borrow more often and do so specifically using microcredit. It seems that they are aware of their self-discipline problems and try to overcome them by seeking a tool that “ties their hands” and prevents them from over-spending. Microcredit offers exactly such a structure and provides them with the desired discipline: group repayment and small, frequent installments. Add the fact that the loans are renewed and the difference between borrowing through microcredit and disciplined saving starts to disappear. But saving through microcredit is not cheap. Monthly interest rates on microcredit often exceed three percent. If the poor are willing to pay to save, it would be useful to move beyond providing only microcredit. Next microfinance revolution may thus have a form of providing access to microsaving products.

How does microcredit work?

Microcredit provides several innovations, which have proven to ensure high repayment rates by the poor. The loans are typically given to a group, which is liable as a whole. Individual members of the group thus have an incentive to monitor others’ repayment discipline. Loans are repaid in frequent, low and regular installments. The group can obtain another loan only if the outstanding one is fully repaid.

How do informal saving products work?

Deposit collector – comes to clients house-by-house and collects low, yet frequent deposits. Deposit collectors charge a non-negligible fee for their service.

Rotating savings and credit associations – aa group of people who save together. At regular meetings everybody deposits a pre-agreed sum into a common pot. The collected money is taken home by one of the members. The meetings continue until each saver has taken the pot once, then the whole cycle repeats. As one member puts it: “You can’t save alone.”


  • - Microcredit remarkably resembles informal saving products. Both provide support for people with self-discipline problems.

  • - Women with low self-control save less and borrow more using microcredit. They may use microcredit as a way to save.

  • - Reliable microsavings product may help poor individuals with self-control difficulties to better manage their money at less expense.


Bauer, M., Chytilová, J. & Morduch, J. (2012): Behavioral Foundations of Microcredit: Experimental and Survey Evidence from Rural India: American Economic Review.

Related literature:

- Gugerty, M. K. (2007): You Can’t Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya. Economic Development and Cultural Change.

- Ashraf, N., Karlan D., & Yin, W. (2006): Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines. Quarterly Journal of Economics.

- Collins, D. et al. (2009): Portfolios of the Poor: How the World‘s Poor Live on $2 a Day. Princeton Uni Press.


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