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Jun 2, 2010

The Savings Moment: Is Savings More Important than Credit?

Microfinance USA Conference
Plenary address delivered on May 21, 2010 by Andrea Levere

The Savings Moment

My task today to bring savings into our conversation about the future of microfinance in the US. To do so, I would like to start my remarks with a quote from Barack Obama from April 2009:

"We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity: a foundation that will move us from an era of borrow and spend to one where we save and invest."

It is this quote that has inspired CFED to title its upcoming Assets Learning Conference on September 22-24: The Assets Movement at its Moment: Creating a Save and Invest Economy and what grounds my remarks today as we consider the role of savings in microfinance.

I approach this topic with much reverence and attention to history—and what a treat to listen yesterday to the living history session that reflected on the origins of the microfinance field in the US thirty years ago as well as where the industry is and ought to be heading. It was almost exactly 30 years ago when CFED—the Corporation for Enterprise Development—was founded with a simple mission—to demonstrate that self-employment was viable route out of poverty for a significant percentage of low-income people. We tested what was then viewed as a "radical" notion in our first policy demonstration—the Self-Employment Investment Demonstration—in five states with women on welfare which showed that low-income women, equipped with high quality training, counseling and financial tools—could succeed as entrepreneurs in roughly the same percentage as anyone else in our country.

This demonstration set CFED on a path of building assets and expanding economic opportunity for low-income individuals and communities through a business model that connects community practice, public policy and private markets in new and effective ways. Our core assumption is that we view low-income people as producers of their own economic futures, and we seek program and policy strategies that open pathways into the mainstream economy. Our work advancing self-employment and microenterprise has broadened to embrace the full range of asset-building strategies that link and supplement more traditional income maintenance approaches with wealth creation opportunities—home ownership, entrepreneurship, education, and savings and investment. 

A New Economic Order

Now it is time to look at our field with fresh eyes as we find ourselves amidst a new economic order, forged initially by the unprecedented financial and economic crisis of the past two years, and now in a constant state of change and reinvention as stakeholders across the sectors all aim to leverage this unique moment in time to either protect what was once theirs or ensure that what occurred never happens again. After listening to the international practitioners describe the context and practice of their work, I want to underscore how different the capital and financial market context in the US is from their experience. While there are communities within the US whose living conditions resemble those of developing nations, their defining characteristic is seemingly infinite diversity. And no matter where these communities are, they are surrounded by the most highly sophisticated financial services industry in the world—whether it is mainstream or alternative, prime or predatory.

The changing roles of finance and the financial industry in our economy have been succinctly captured by Simon Johnson and James Kwak, authors of 13 Bankers: "We should…think of finance as something like a regulated utility (an industry on which the economy depends but that should be watched over carefully) and something like big tobacco (an industry that makes toxic products with huge negative externalities)."

Yet amidst crisis can sometimes come opportunity, and I believe that microfinance—as an essential part of the broader asset-building field—is uniquely positioned to add a third dimension to Johnson and Kwak’s framework—by leveraging the product development capacity, distribution networks, philanthropic commitments and market knowledge—both independently and in partnership with more mainstream financial institutions—to create products and services that expand financial security and economic opportunities for low-income entrepreneurs and communities. The issue in the US isn’t primarily one of access, rather, it’s the products. This in no way denies the need for effective regulation that restrains the worst practices and rewards those that promote true community benefits. Rather, it builds on decades of public/private/nonprofit partnerships to leverage the strengths of each sector at an entirely new level of scale, impact and program and product integration. And by doing this effectively, we have the ability to change the balance of power that low-income consumers and entrepreneurs experience in the marketplace.

There is no silver bullet to ending poverty

Arguably the worst thing that ever happened to the microfinance field as it has gained unprecedented attention and glamour is the false idea that it—and it alone—was a "silver bullet" to end poverty. A speaker on one of yesterday’s panels called this ‘bad branding." All of us who have dedicated our careers to this work know firsthand the complexity of poverty reduction; sometimes it feels there are as many causes of poverty as there are poor people in this world. But just because microfinance isn’t the only solution to poverty, it doesn’t mean that it isn’t part of suite of products and services that are demonstrating every day their ability to transform lives and economic futures or offer "choice" to those people whose lives have little to spare. There is growing consensus not only in the US but internationally as well that it is time for a more balanced approach to the provision of financial services to the poor—and this means we include savings in how we do business. I would like to make the case for savings in three ways:

1. Matched savings is an essential anti-poverty tool and route to economic security

Over the past decade, more than 500 organizations throughout the US that offer matched savings have demonstrated that low income and even very low-income people—given the same structures and incentives offered routinely to middle and upper-income people—will not only save for their futures, but do so at levels never imagined; as I often say, when we offer middle and upper-income people financial incentives, we call it policy, but when we offer those same incentives to low-income people, we call it subsidy.

Fundamentally and practically, savings is about managing risk and creating hope for the future. It changes the objective financial condition of families, increases economic resiliency, and builds aspirations—especially for college. Recent research has shown that children in households with savings dedicated for college education are four times more likely to attend college that those without savings, and when children have a savings account in their own name, they are seven times more likely to attend college.

Savings accounts are an essential strategy to address the 22.5 % of US households that live in asset poverty—defined as not being able to subsist at the poverty level for three months if a household’s main source of income is disrupted. And savings is equally important to bring financial access to the 25.6% of US households that are either unbanked or underbanked today.

If there is anything that this financial crisis has taught us, it is that the road to financial security and wealth creation is not built on debt alone. Last month, CFED and the Urban Institute released a report called Weathering the Storm: Have IDAs Helped Low Income Homebuyers Avoid Foreclosure?  The study tracked 831 homebuyers in 17 states who purchased homes using IDAs [Individual Development Accounts] between 1999 and 2007. When compared to other low-income homebuyers who purchased homes in the same communities and over the same time period, IDA homebuyers:  obtained significantly preferable mortgage loan terms, with only 1.5 percent having high-interest mortgage rates, compared to 20 percent of the broader sample and were two to three times less likely to lose their homes to foreclosure. 

This study documents what every practitioner in this room knows: that wealth creation done right is a combination of access to high quality debt, savings or equity, and appropriate financial and asset-specific education—be it for homeownership, education or microenterprise.

2. The Golden Rule of Finance: matching sources and uses of funds

Before I joined CFED, I spent 9 years underwriting small business loans and training entrepreneurs in business finance. I loved it because every business was a unique story. If real estate is about making the market, business success depends on beating the market. But there was one rule of finance that could never be violated if a business was to succeed—it must match its sources of funds to its uses. High risk uses need to be funded by equity; moderate risk uses by long-term debt; low risk uses by short term debt. The most common financial reason that businesses fail is that they don’t enough equity to absorb start-up losses; the most common reason why businesses grow themselves out of business is that there is not enough patient, or permanent working capital, to fund growth. While middle and upper-income entrepreneurs get the majority of their start-up equity capital from families and friends; low-income entrepreneurs rarely have this luxury, and thereby start their businesses with much greater financial risk which also serves to constrain their growth.

Our existing policy and financial structures do not do enough to mobilize savings on behalf of entrepreneurs outside of IDAs—the primary financial product with a business use. While our account infrastructure supports retirement, college savings and homeownership, we need to ensure that the universal structures we rely on to save over our lifetimes recognize and facilitate entrepreneurship on an equal level with other uses.

3. Achieving scale in microfinance in the US requires an integrated approach

Bringing microfinance to a new level of scale in the US requires that we take an integrated approach, and leverage the full range of asset-building products and services on behalf of entrepreneurs. Five years ago, CFED assessed and reinvented its microenterprise strategy through a new initiative called the Self-Employment Tax Initiative. SETI is a small business development strategy that uses the tax code and tax day as a vehicle to help low-income self-employed businesses formalize, grow and access tax code-based asset-building opportunities. Today, there are over 10 million self-employed businesses in the US, and most start out, by default, as sole proprietorships or unincorporated businesses. Taking the leap to formalize their businesses through IRS form Schedule C (essentially a business profit and loss) buys entrepreneurs into the social safety nets of Social Security and Medicare and qualifies them for the Earned Income Tax Credit (EITC). Annually, the federal EITC delivers $7.5 billion in capital assistance to 4.4 million self-employed households—making it the single largest capital support program for self-employed businesses in the nation. This is an approach designed for scale that builds on the years of success mobilizing tax time as a savings moment, for the benefit of 2 million start-up and small businesses annually to help them build assets, create jobs and strengthen local businesses and economies.
SETI is just one of many innovative approaches, ranging from financial counseling to an explosion of new private/public partnerships to support small business, that add new products and services to our long-term strategy of business training and microloans to reach new levels of scale in US microfinance.

Time to rebalance the asset-building portfolio

For many decades, the US has invested the lion’s share of its wealth creation subsidies in support of the American Dream of homeownership. We all know the many proven reasons why this strategy has been a route out of poverty and into economic stability for low- and moderate-income Americans. It offers low-income Americans their one opportunity to leverage their equity in the belief that homes appreciate over the long-term. But we may have reached the limits of homeownership as our wealth creation strategy and the growing national recognition of the importance of microfinance and entrepreneurship makes it just the right time to rebalance our asset-building portfolio—with a new focus on policy, practice and market innovations that support and expand microfinance.

1. The Policy Moment:

We have a moment to leverage to local, state and federal policy to promote savings, with strategic connections at the state and local level, to create the "plumbing" that can take asset building to scale in ways we have imagined before, but never accomplished. The policy opportunities create savings incentives, reduce savings and asset-building barriers, and create new financial markets for microenterprise and CDFI lenders. Let me mention just a few of the big opportunities:

• Saver’s Credit: 50 million households with an asset-building incentive of up to $500
• Reauthorizing the Assets for Independence Act: largest source of federal funding to support matched savings and operations for IDA programs
• Improvements to SBA’s programs supporting microenterprise and execution of a new program—Rural Microenterprise Assistance Program, through USDA
• Asset limit reforms: SSI savers act; yesterday the state of Maryland announced it was eliminated all asset tests when determining eligibility for temporary cash assistance
• Children’s Savings Accounts: launched Children’s Savings Account Coalition and ASPIRE ACT introduced
• Bank On USA--$50 million program to expand financial products and services to the un/underbanked

2. The Finance Moment: Create our own capital markets to expand microfinance

Record levels of public funding and unprecedented amounts of private funding targeted at small business development offer us the opportunity to expand the role of MFIs and CDFIs to provide credit and savings products. We must leverage this moment to invent the full range of financial products—ranging from credit enhancements to PRIs to senior debt to create products and services that match the savings and financing needs of entrepreneurs and get access for proven tools, such as the SBA 7(a) guarantee program for CDFIs.

3. The Technology Moment.

Let’s learn from our international colleagues and the example of Kiva.org yesterday to leverage the technology moment on behalf of savings for entrepreneurs. It should come as no surprise that the Bay Area is once again the site of the first major effort to create a national technology and marketing infrastructure for matched savings in the US. The American Dream Match Funds in Silicon Valley and San Francisco is a partnership between CFED, EARN, the Opportunity Fund, Juma Ventures and the 3 community foundations—Silicon Valley, San Francisco and Marin—and the United Way to bring individual donors into the field. Our technology platform—SaveTogether.org—has launched with powerful stories and the offer of matching the savings of a low-income saver with as little as a $1. But the sheer number and impact of the microfinance lending websites shows "the power of a correct idea to replicate rapidly." Help us figure out to connect debt and savings as effectively online as we do inside a business.

Thank you.