DEMAND AND CHALLENGES OF ACCESSING SAVING PRODUCTS IN TAJIKISTAN MICROFINANCE INSTITUTIONS pdf

Findings also affirmed that demand for voluntary savings among the poor households is there in Tajikistan, compulsory savings is not considered as savings product because it is part of t

DEMAND AND CHALLENGES

OF ACCESSING SAVING PRODUCTS

IN TAJIKISTAN MICROFINANCE INSTITUTIONS

BY

JACQUELINE STENGA

SUPERVISOR: DR MAREK HUDON

A Master Thesis Submitted in Partial Fulfillment of the Requirements For the European Master in Microfinance - European Microfinance Program Solvay

Brussels School of Economics and Management Universite Libre de Bruxelles- Belgium

September, 2010

ABSTRACT

The main objective of the case study was to describe how savings products are offered

by MFIs in Tajikistan The study specifically addresses the following issues; first, types

of savings products offered by MFIs in Tajikistan Second, what factors which supports

or constraints poor households (or micro and small entrepreneurs) to access/ enjoy savings services from MFIs in Tajikistan Third, the study tried to identify challenges facing MFIs when offering savings products

This study involved the use of three research instruments during collection of data, that

is, questionnaires, interviews, and focus group discussions Respondents were drawn from the clientele base of various MFIs in Tajikistan and representative of five MFIs Questionnaires were employed to collect data from eighty (80) respondents, and Focus Group Discussions involved sixty four (64) respondents, whilst interviews was conducted only to five representative of MFIs in Tajikistan Questionnaires and FGDs supplemented each other by providing data from demand side (customers) while interviews to representatives of MFIs provide data from supply side (service providers)

Findings reveal that common types of savings products in Tajikistan are term deposits, classic deposits, and special deposits (children deposits) These products are offered in local currency as well as in foreign currency Study observed that there is tendency of keeping their deposits in foreign currency in Tajikistan Findings also affirmed that demand for voluntary savings among the poor households is there in Tajikistan, compulsory savings is not considered as savings product because it is part of the requirements to access loans to MFIs

This study also find that household income, proximity to financial institution, transaction costs, returns, security, level of education, nature of employment, household social intervention, and flexible product features are key factors from the perspective of MFIs’ client From the service provider perspective, this study noted that competition from experienced banks in savings products, nature of microfinance transactions (small but voluminous), and management of such transactions as key challenges

ACKNOWLEDGEMENT

I feel indebted to all people who have extended help and assistance to me in the preparation of this thesis I acknowledge that without their help this thesis would not have been completed Although I cannot mention all of them by name the following people need special attributes

First and foremost, I am very pleased to acknowledge the patience, encouragement, moral and material support which I received from my husband, Mr Phillip Kirenga and

my sons Colin and Ibrahim, indeed they have sacrificed to me a very meaningful time that has enabled me to come this far Equally I feel obliged to extend my sincerely gratitude to my parents, Evelinus and Hellen Stenga

Second my special thanks should go to my supervisor Dr Marek Hudon, of the Free University of Brussels (Universite libre de Bruxells-ULB) for his timely feedback and comments that were most valuable in the completion of this work Despite his busy schedule he found time to go through and correct my work

Third I would like to express my sincere thanks to Ms Justyna Pytkowska a researcher

at MFC Poland and Ms Magdalena Wronska researcher assistant who tirelessly helped

me to organize and eventually collect data in Tajikistan both by questionnaires and FGD Special thanks to Magdalena for the role she played in the accomplishment of this study, specifically in translating my questionnaire from English to Russia and even

my final data back to English I also feel highly indebted to management of MFC Poland and all the staff for their immeasurable support I can say confidently that without their help this thesis would never have been completed

Lastly but not least I owe thanks to all the people who could not be mentioned here but have contributed in one way or the other into the completion of this thesis To all of you I say thank you and may our Almighty God bless you

Finally while acknowledging the assistance of institutions and individuals mentioned above I remain personally responsible for all errors and shortcomings that might be found in this thesis

TABLE OF CONTENTS

ABSTRACT i

ACKNOWLEDGEMENT ii

TABLE OF CONTENTS iii

LIST OF TABLE v

LIST OF ABBREVIATIONS i

CHAPTER ONE 1

BACKGROUND INFORMATION 1

1.1 Background 1

1.2 Study area description 2

1.3 Deposits market trend in Tajikistan 3

1.4 Problem statement 4

1.5 General Objective 4

1.6 Research Questions 5

1.7 Limitation of the study 5

CHAPTER TWO 6

LITERATURE REVIEW 6

2.1 Microfinance services and poor communities 6

2.2 Motives for low income people to save 7

2.3 Types of savings products needed by poor households 9

2.3.1 Compulsory savings 9

2.3.2 Flexible (voluntary) saving product 10

2.4 Challenges facing low income people to save with financial institutions 11

2.4.1 Supply side 11

2.4.2 Demand side 12

2.5 Empirical Evidence 13

CHAPTER THREE 15

RESEARCH METHODOLOGY 15

3.1 Methods 15

3.1.1 Research Instruments 15

3.1.2 Sampling Design 15

3.1.3 Sample Selection 16

3.1.4 Data Collection 16

3.2 Data Analysis 16

CHAPTER FOUR 17

FINDINGS AND DISCUSSION 17

4.1 Introduction 17

4.2 Description of the Respondents 17

4.3 Microfinance Organization in Tajikistan 18

4.4 Savings Products: The Perspectives of Service Providers 19

4.5 Types of deposit products, Organizations, and Tariff Guide 21

4.6 Factors that influence the usage of savings services from financial institutions

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4.6.1 Household income 24

4.6.2 Proximity to financial institution 24

4.6.3 Transaction costs 25

4.6.4 Returns 25

4.6.5 Security 26

4.6.6 Level of education 26

4.6.7 Nature of employment 27

4.6.8 Household social intervention 27

4.7 Focus Group Discussion- summaries 27

4.7.1 Forms of Savings 27

4.7.2 Source of Income 28

4.7.3 Household Expenditure 28

4.7.4 Factors that affect people’s savings behavior 28

4.7.5 Poor households’ trustfulness on financial institutions 29

4.7.6 The trust to formal financial institutions like MFIs compared to Banks 29

4.8 Conclusion 29

CHAPTER FIVE 30

CONCLUSIONS AND IMPLICATIONS 30

5.1 Conclusions 30

5.2 Implications 31

5.3 Suggested area for future research 31

REFERENCES 32

APPENDICES 36

LIST OF TABLE

Table 1: Gender Profile of the Respondents 18

Table 2: Financial Institutions in Tajikistan 19

Table 3: Deposit Products in Local Currency 22

Table 4: Term Deposit in Local and Foreign Currency 23

Table 5: Attributes that influence Financial Inclusion (Demand Perspectives) 26

Table 6: Microcredit and Micro-Deposit Services in Tajikistan as of 1 January 2009 36

LIST OF ABBREVIATIONS

AMFORT Association of Microfinance Organizations of Tajikistan ASCA Accumulating Savings and Credit Association

CGAP Consultative Group to Assist the Poor

GDP Gross Domestic Product

MDO Micro-Deposit Organization

MFI Microfinance Institution

MLF Micro loan Fund

MLO Micro loan Organization

PPP Purchasing Power Parity

ROSCA Rotating Savings and Credit Association

WSBI World Savings Banks Institute

CHAPTER ONE BACKGROUND INFORMATION

1.1 Background

Historically, Microfinance Institutions (MFI) offers credits mainly to poor people as a way to alleviate poverty Today, there is a growing recognition that credit alone is not the only panacea of alleviating poverty Poor people need and uses a variety of financial services, including savings Savings have risen to the top of the microfinance as previously MFI focused primarily on providing loans and saving remained the “forgotten half” (Vogel, 1984) The recent shift from microcredit to microfinance reflects the recognition that all saving services and not just credits may help to improve security, manage risk and thus, in the long run improve the quality of lives of the poor household in developing countries (Morris and Meyer, 1993: MacIsaac, 1997: Zeller and Sharma, 2000) Savings can serve as invaluable reserves, as insurance against crisis factors such as illness, natural disaster, theft and other necessary human needs like education and housing that can easily drive the poor into destitutions (Karlan and Morduch, 2010) Like credit, saving helps households turn a sequence of small sums into useful lump sums But, in real situations households prefer to save rather than borrow because it is low cost and gives them more control over their lives (Rutherford 2000) Moreover savings is a safer approach, and one that is appropriate for all families as at times borrowing is a high risk decision for poor families (Collins et al 2009)

Poor people have multiple demands on their scant resources, they normally saves for specific time and specific purposes at an event found to motivate them to save more Field surveys reveal that they prefer small, regular contributions that are collected at

their doorstep (Karlan et al, 2004) At other time some features like “illiquidity or commitment savings” that hinder withdrawal also facilitate more savings (Karlan et al,

2004) Moreover, deposit taking is both a service to clients and potentially the largest and most immediately available cheap source of capital for financial institutions For client savings provides an apparent ‘cushion’ for timely repayment of loans, can also

be used as an alternative and rather cheap source of funds for the MFIs, due to the

fact that the interest rates for deposits are regularly lower than those for loans (Schmidt and Zeitinger, 1998; Robinson, 2000)

Various studies have illustrated that poor people in developing countries including Tajikistan understand the importance of saving for future consumptions (Todd, 1996; Rutherford, 2008) But, most of them fail to access to safe and formal deposit services as majority of these institutions which mobilize savings like commercial banks, postal savings banks and credit unions, are not accessible in terms of both proximity, or the time and procedures needed to complete transactions are too burdensome to poor households Likewise they may impose barriers like minimum transaction sizes and require savers to retain a minimum balance or operating hours may not be convenient for poor savers, both of which can exclude the poor (CGAP, 2005) Those who manage to save, are forced to invest informally in risky investments like jewelry, gold, animals or use of informal saving services which require time to be converted into cash (e g saving clubs, ROSCA, ASCA) and at times they lose much of these savings either by natural disasters, theft or eroded by

trivial expenditure (Moulick et al., 2008)

Therefore, practitioners, politician and scholars should have a strategy to promote and ensure that poor people are aware and have access to the usage of formal financial institutions to provide saving services This study will therefore investigate the demand and challenges of accessing saving products to poor households in Tajikistan Microfinance Institutions so as to have successful implementation of the savings products

1.2 Study area description

Tajikistan, the former state of the collapsed Soviet Union, with a 7.3 million population, is one of the poorest of the post-Soviet republics with a per capita income

in 2008 of less than $ 600 ($1,870 in purchasing power parity (PPP) terms It’s estimated that 64% of Tajikistan citizens live below the poverty line of US$2 per person per day Two thirds of the population is engaged in subsistence agriculture, and more than half the country's population lives in poverty (World Bank, 2008)

Tajikistan's economy is dependent on agriculture and livestock rising Two thirds of the labor force is still Agriculture, 67.2% which is dominated by cotton, grain, fruits,

grapes, vegetables; cattle, sheep and goats; Industry: 7.5% mainly aluminum, zinc, lead; chemicals and fertilizers, cement, vegetable oil, metal-cutting machine tools, refrigerators and freezers and other Services accounts for 25.3% Industry is poorly developed, providing 25% of GDP and only 7.5% of total employment

The adverse effect emanated from civil war that ended in 1997 and also seasonal and fluctuating calamities that have been accompanied by a series of natural disasters, including floods, landslides, mudslides, droughts and other natural disasters, harms agricultural business and eventually hinder the economic growth in rural areas and financial system in general1

1.3 Deposits market trend in Tajikistan

As of January 2010 the Market Mix report shows that, in the Republic of Tajikistan there are 13 banks, 6 credit societies, 1 non-banking financial institution and 116 micro financing institutions Out of 116 MFIs only 31 MFIs qualified to mobilize deposits from clients as per National Bank of Tajikistan regulations The minimum amount of authorized capital for newly founded micro credit deposit organizations from September 1, 2009 has been set in the sum equivalent to USD 800 000 (eight hundred thousand Us dollar) which might be the reason why majority of MFIs fails to meet this regulatory requirement for mobilizing savings as per regulatory from National Bank of Tajikistan

As compared to other regions of ECA and NIS, Tajikistan Microfinance market is very small in terms of both absolute numbers and penetration rate Table 6 as per attached appendix indicates that majority of microfinance services in Tajikistan are carried out by non bank providers, primarily Microloan Organization (MLOs) and Microloan Funds (MLF) Micro-Deposits Organization (MDOs) represents the least prevalent MFI form as it calls for the highest funding capital and requires staff to have

a comparatively high level of working experience in the financial sector Deposits taking in these institutions are very limited as most of micro-deposits services are

1

Venkatachalam B V (2006); Microfinance in Post-conflict Tajikistan: Issue and Challenges, Korean International Institute of Economic Policy, Seoul

offered by banks which indicate that these services do not reach down market (MIX and AMFORT report, 2009)

Savings is of low priority among the micro-finance borrowers surveyed On the other hand due to the weak financial system, most of the clients never trust the banks or any other formal financial institutions for depositing the savings As a consequence, the clients of microfinance prefer to invest the money back into the business, save money in hard currencies or rarely spent on household durable (MIX and AMFORT report, 2009)

1.4 Problem statement

Despite the fact that local population has substantial demand for saving products, majority of the clients in Tajikistan are unaware of a number of MFI and their services (MIX and AMFORT report, 2009) due to the weak financial system According to CGAP (2002), Savings plays, not only crucial role in financing productive activities but also promotes micro-enterprises Furthermore, evidence shows that the

“accumulation of savings helps to create a domestic capital base that makes economies less dependent on foreign capital and more resistant to capital market fluctuations”(CGAP, 2006) This is adequate evidence that poor people in developing countries include Tajikistan accredit high importance to savings

Exploring issues related to demand and challenges of accessing saving products among the poor households who are self employed in productive activities, is one of the issues for assisting poor people to promote their micro-enterprises Therefore, this motivates the researcher to see the necessity to conduct the study focusing on the demand and challenges of accessing saving products to poor households in Tajikistan microfinance institutions

1.5 General Objective

The general objective of this study was to describe the position of MFIs towards

delivery of Savings products in Tajikistan Specifically the study tried:

1) To identify available savings products offered by MFIs in Tajikistan

2) To identify factors that supports or constraints poor households (or micro and small entrepreneurs) to access/ enjoy savings services from MFIs in Tajikistan

3) To identify challenges facing MFIs in Tajikistan when offering savings products

3) What are the challenges encountered by MFIs in Tajikistan when offering savings products?

1.7 Limitation of the study

This study experienced a number of limitations which includes the following:

The study was conducted in Tajikistan where English language is not their native language; majority of Tajikistan speaks Russian language This communication barrier necessitated the researcher to translate questionnaire and interview guide from English to Russian

Tajikistan is Muslim country of which the norms and customs of Islamism does prevail in day to day life of the Tajikistanis From the Islamic teachings, men and women are not allowed to mingle around together if they are not close relatives; therefore formation of groups for FGDs was aligned by this prevailing customs The gender of facilitator or moderator need have to reflect the gender composition of the group Group of men was facilitated by man facilitator while female facilitator did supervise the activities of groups dominated by female respondents

Low rate of return by a significant number of questionnaires was noted Out of one hundred and twenty questionnaires, only eighty were returned This explains that one third of intended questionnaire was not filled and returned This affirm to one weakness of the use of instrument (researcher has no control on the aspect of returning the filled questionnaires)

CHAPTER TWO LITERATURE REVIEW

2.1 Microfinance services and poor communities

Microfinance, according to Otero (1999) is “the provision of financial services to income poor and very poor self-employed people” These financial services include savings and credit but can also include other financial services such as insurance, transfer of payment services and remittances Schreiner and Colombet (2001) define microfinance as “the attempt to improve access to small deposits and small loans for poor households neglected by banks.” Therefore, microfinance involves the provision

low-of financial services such as savings, loans and insurance to poor people living in both urban and rural areas and who are excluded to obtain such services from the formal financial institutions

Savings basically is about choosing between current and future consumption Savings theories traditionally “predict that current consumption is related not to current income, but to a longer-term estimate of income” The life-cycle hypothesis (Modigliani 1966) predicts that “individuals hold their consumption constant over their lifetime; they save during their working years and draw down their savings during retirement.” The permanent income hypothesis (Friedman, 1954) argues that consumption is proportional to a consumer’s estimate of permanent income”

However the hypothesis fails to explain the reality of poor households in developing countries, for example Deaton (1989) suggests reasons why the two hypotheses might be of limited use First, the existence of extended families, which are multi-generational households that leads to smoothing income over time therefore reducing the need to save for later, second, the case of small, uncertain and unstable income in most of developing countries making it difficult to forecast the cash flows for longer term, and third, majority of poor people’s are likely to be credit constrained,

so that borrowing in early years will be difficult He further suggests that “savings in developing economies often plays an important role in buffering between income and consumption Individuals often save small amounts at frequent intervals to smooth income, rather than accumulate or save for retirement.”

In comparison with the literature on credit demand, there are fewer contributions on the savings demand of poor households in developing countries Most studies focus

on informal savings like rotating savings and credit associations (ROSCAs), or financial savings (for instance, livestock, stock of crops, or jewelry) which have received greater attention than formal options, particularly in the sub-Saharan Africa perspective (Gurgand et al 1994, Fafchamps et al 1998, Kimuyu 1999, Aryeetey and Udry 2000, Hoogeven 2003) It is clear that the savings of the poor are held in the informal sector

non-The formal sector like banks, MFIs, cooperatives and postal savings banks has only

a limited capacity to meet the savings needs of the poor, thus absence of formal savings services results in the “financial exclusion” of the larger population In that regard, informal savings prove the savings potential of the low-income people who use them and the unmet demand for savings services (Moulick et al 2008) On the other hand Gugerty (2003) argues that, “it is largely invisible to the formal sector because majority of poor people in developing countries save informally and offers insight into some of the potential behavioral constraints on savings” For instance, in Ghana, poor households pay for “susu” collector who travels to individual home or businesses everyday in order to collect savings deposits.2

Nevertheless, Kiiza and Pederson (2002) on their study in Ugandan context, pointed out that the decision for poor households to open bank saving account is positively related to the level of education, proximity to financial institution, work experience, transaction costs and the level of permanent income Above all confidence in security

of the savings and customer care of institution staffs are of crucial importance

2.2 Motives for low income people to save

Browning and Lusardi (1996) on their studies evaluate nine models that used to explain motivations to save as follows; “precautionary, life-cycle (to provide for anticipated needs), inter-temporal substitution (to enjoy interest), improvement (to enjoy increasing expenditure), independence, enterprise, bequest, avarice, and

2

Source Aryeetey and Steel (1995) noted that susu collectors collect deposits from customers every day, they never charge interest on the deposits but they keep one deposits per month as a fee

down-payment’’ In spite of this, Spio and Groenewald (1996) noted that the savings demand determinants in developing countries differs from those in developed countries and often contradict the theoretical assumptions of the life cycle theory They further shows that, “strong family ties seem to make it less necessary to save for future retirement, and remittances appear to influence the timing of savings within the life cycle of a household”

Extensive evidence from around the world shows that the poor do save and that they need secure places where they can build usefully large sums of money Indeed, there

is greater demand for secure savings services than credit on the part of the very poor Most very poor people can and do save They must save to reach their financial goals such as life-cycle needs (predictable events), meet emergencies (unpredictable events) and lastly are the need to finance opportunities or investment in existing business or establishing new enterprise or home (Sadoulet, 2006)

Equally savings services are at least more valuable than access to credit With

“savings there is no risk of debt traps” though it might take longer time to accumulate the money needed for investment For example, Kaboski and Townsend (2005) found that “pledged saving accounts have a significant impact on long-term asset

growth in Thailand” Likewise, Michal et al., (2008) argue that “some women take up

micro-credit schemes as a way of forcing themselves to save through required installment payments” This is an evidence that poor people save even though in many cases seem to save not only for a specific time or specific purposes but also for general emergencies, thus leaves them vulnerable to unexpected risks and also it reveals that there exists demand for formal saving services, and that the provision of these services can have great impacts on the livelihood of the poor people Another survey by (Lafourcade et al 2005), shows that “many financial institutions have thus established deposit accounts to the extent that the number of deposit accounts outnumber those of outstanding loans in sub-Saharan Africa today”3 As a result, there is a vast unmet demand for savings services as effective savings services can enhance the financial management of the poor and increase their assets

3

The region has therefore been called the big “savings exception” (MIX 2007, Basu et al 2004)

Some practitioners believe that formal services, such as those offered by banks and other formal financial institutions, are the best places for the poor to save with respect

to safety and confidentiality Marguerite Robinson’s (2001) research showed poor people would like to have individual bank accounts, as well as other product features provided by banks for instance “security, convenience, liquidity, choice of demand driven products, helpful and respectful service, confidentiality, and returns” though at times most of these services exceed the capacity of savings deposits institutions (Haynes and Levin, 2009)

Additionally savings are of greater importance to make income-generating activities,

to exacerbate family against income variations, unanticipated future shocks that might drive the family back into poverty cycle, and “insurmountable debt” Equally savings are acknowledged to have long-term “asset effects” that may not only motivate to pursue education or employment, but also to help poor household to have a more optimistic outlook for the future Therefore matched savings schemes are employed to enhance savings of low income households and as a way to save for “productive investments, microenterprises, education, and health purposes”

(Zimmerman and Banerjee, 2009)

2.3 Types of savings products needed by poor households

2.3.1 Compulsory savings

Compulsory saving is among the requirement or preconditions for receiving credit in MFIs MFI clients are supposed to deposit certain amount on weekly or bi weekly or monthly in order to attain certain percent before being disbursed a loan Clients are not allowed to withdrawal partial or full amount of their savings until are loaning free

or decide to leave the organization (Robinson, 2001; CGAP, 2005) On the other hand compulsory saving is used as loan insurance or cash collateral for loans and a part of the loan is secured by the savings This restriction has forced the MFI clients

to save some amount of money that would not have been possible to save by them For instance, Matin (2000) argues that “since poor people’s incomes are current income, compulsory savings provide the strong commitment that is necessary to save out of current income” There are critics about compulsory saving since clients have no easy access to their savings Others argue that compulsory savings should not be called a ‘service’ because it is a down payment on a loan and it does not

respond to accumulation and precautionary savings motives”, these two factors affect the decision to save (Zeller and Sharma, 2000)

2.3.2 Flexible (voluntary) saving product

From client’s side, there is a demand for such products Low income people can save more money at their doorsteps instead of travelling far to deposit with banks A survey by Rahman (1998) showed that “lack of proximity is one of the major reasons for not depositing savings with a bank” Sadoulet (2006) also noted that the poor need to save when they have the opportunity to do so, to withdraw in times of need and to do this without lessen their savings over time Thus, savings services must have four properties; “Safety, accessibility, flexibility and positive returns” (Marcus

et.al 1999: Rutherford 2000b: FAO 2002) Otero and Rhyne, (1994) pointed out that

“there is considerable evidence that poor people greatly value flexible savings services, where they can save unrestricted and often very small amounts at convenient intervals, and which they can access rapidly” There is growing evidence that “offering voluntary, safety and accessible savings services might results in the inclusion of the poorest by 10-15% of the population, who are reluctant and thus not saved by MFIs” (Montgomery, 1995; Wright et al, 1997; CGAP Working Group, 1998)

Furthermore, Goldstein et al (1999) identified two forms of voluntary savings products, namely “Cash Deposits and Time Deposits” On one hand cash deposits are the most commonly used savings products They are very flexible to savers since little amount is required to open an account; deposits are made as per clients’ wish, and at the same time the accounts are very accessible and provide liquid deposit services It further offers an “opportunity for customers to place excess liquidity in a safe and secure place thus providing the capital for future investment or consumption expenditures” Time deposit on the other hand represents a large amount of savings for a fixed term and at a fixed interest rate and normally is mostly operated by middle income earners For instance, time deposits are a form of commitment savings and also pay a higher interest rate Hence, it is inaccurate to declare that time deposits

are as a popular means to commit to save by low-income people (Karlan et al 2003)

Moreover a study by Bass et al (2000) validates that voluntary savings services attract a larger number of depositors and a higher savings amount than compulsory savings since the voluntary savings facilities is not limited to those who save only as

a prerequisite for accessing a loan

2.4 Challenges facing low income people to save with financial institutions 2.4.1 Supply side

Poor households do not want to use formal financial services due to cost implication such as transaction costs (fee and minimum requirement), liquidity or proximity to financial institutions; they prefer informal services due to the reasons like lower transaction costs and greater flexibility Bertrand et al (2010) in a survey in South Africa tested the relative importance of interest rates on poor household decision to open saving account and marketing features, they found that “interest rates mattered,

as well as marketing features” Likewise interest rates influence the usage of formal financial institutions For instance, in an experiment in Philippine conducted by Ashraf

et al., (2006) shows the evidence that “distance to the bank, education and income

are positively correlated with the use of informal financial institutions” On the other hand, Rahman (1998) shows that lack of proximity is one of the major reasons for not depositing with formal financial institutions “Flexible savings are in line with the realities faced by the poor, while high frequency activity is a barrier between consumption and income” (Deaton, 1989)

Dowla and Alamgir (2003) also noted that low saving could reflect a supply constraint, as poor household have few alternatives to deposit cash savings which in turn they use in kind saving or convert their saving into assets They further argue many MFI clients have multiple loans and hence have to use their cash incomes to repay their loans and meet compulsory savings requirements Research has found that, for MFI clients, savings products are as popular as “working capital and credit for investments” There has been ongoing shift from poverty lending and mandatory savings products since 1990 to a financial systems approach that acknowledge the

importance of savings for the poor The challenge for MFIs is to design effective savings mobilization strategies that respond to different client needs” (Bass

“cost-et al., 2000). Similarly low-cost saving products that are easily accessible (opening hours and proximity), secured with positive returns (interest) and more attractive

value scheme than what they already access informally should be prioritized (CGAP

FN 37)

Evidence from Asia and Latin America illustrates that the major constraint for savings was product design, as such products need to be tailored specifically to the needs of the poor (Meyer, 2002; Hudon, 2004) The poor require flexible and inexpensive products that match their capacity to save, and address their needs for them to cope with crisis thus there is a strong need for outside saving schemes These schemes however, must correspond to the frequent, small, and uneven transactions patterns that matches with the low-income cash flows (Rutherford, 2000; Sadoulet, 2006)

micro-Last but not least another hurdle for micro-savings institutions is originated from the regulatory requirement of most central banks Among the major role of regulatory authorities is to protect client’s savings who deposits their savings with a financial institution including MFIs As a result, as soon as Microfinance institutions accept deposits from clients, central bankers tend to impose a stringent requirement, such

as capital adequacy and minimum capital that at times make it a difficult for MFIs to cope with it (Christen and Rosenberg, 2000)

2.4.2 Demand side

Transaction cost incurred by poor household to access saving services influences

their decision The time spent to gain access to savings in formal institution is among such cost that leads small savers to prefer informal saving services On the other

hand cost of saving at home is high due to physical risk of theft, floods and grabbing hand of the husband For example, a survey on women in Kenya by Anderson and Baland’s (2002) found that majority of women joining a ROSCA were aimed at saving and keep their money away from their husbands Moreover inflation is among financial risks and also saving must compete against other “pressing claims such as those made by relatives, neighbors, landlords or other creditors, or frivolous spending instead of accumulating into large funds” (Bouman 1983) Platteau (2004) noted that accumulating savings can be difficult in an uncertain and risky environment where savings can be wiped to larger adverse shocks He also pointed out that “high time preference for present consumption, lack of good opportunities to save by poor

people and pressure to lend from social network” could be among the challenges faced by poor people when they save with informal financial institutions

to avoid using it Moreover there is evidence that in Latin America and Africa, households use “tree crops and tubers as a relatively illiquid store of savings” (Godoy

et al 1996)

Other empirical studies suggest that the desire for “flexibility and liquidity” is so paramount that the poor is willing to forgo the desire for obtaining a positive return (Zeller and Sharma, 2000) A survey conducted in rural Kenya by Dupas and Robinson (2009) found that 89 percent of the treatment group opened an account while only three individuals in control group did so4 The researchers find remarkable impacts despite substantial transaction fees charged by the bank ($0.50 or more) In contrast to the Karlan and Zinman (2009) on their study of the impact of credit in the

Philippines and de Mel et al (2008) study of returns to capital, here the impacts were

found only to exist among female entrepreneurs On the other hand FinScope (2007) survey in Uganda shows that 71 percent of Ugandans are currently saving, whereby

15 percent save in informal groups, 4 percent and 15 percent save in semi-formal and in formal institutions respectively.5

A survey by the World Savings Banks Institute (WSBI) (2006) showed that there were 1.3 billion low-average balance deposit accounts against 190 million loan accounts in

4

Dupas & Robinson (2009), provides incentives to open a savings account to randomly selected entrepreneurs, the researchers paid fee to open the account and provided the minimum account balance where the control groups received no incentives

5

FinMark Trust is an independent trust, whose mission is “Making financial markets work for the poor” The Trust initiated collection of FinScope surveys to achieve a measure and understanding of consumer demand across transactions, savings, credit and insurance categories The first FinScope survey was carried out in South Africa

in 2003 Today FinMark Trust has carried out or is currently carrying out FinScope surveys in 14 African countries and in Pakistan.

developing and transitioning economies meaning that microfinance clients want saving services “Poor savers turn small amounts of money into lump sums to help smooth consumption and mitigate the effects of economic shocks” A study in Nicaragua found that more than 70 percent of credit clients press out demand for financial services other than credit that is “savings, remittances, transfers and insurance” (CGAP 2005) Again, a survey in Uganda by Finscope (2007) when asked about financial needs, majority (43 percent) replied first "a place to save", before "a place to borrow" (31 percent)

Gugerty (2007), on his study from 70 ROSCAs in rural Kenya, interestingly found that nearly 60 ROSCAs were “consistent with a self-control commitment though most used the money for more than one purposes”6 Karlan et al (2010) who tested the

effects of making savings more significant by sending clients simple reminders to make deposits found that “even with no commitment, the reminders can be successful in increasing savings rates (by 6%) and helping clients meet savings goals (a 3% increase in the likelihood of reaching one’s goal)” Similar positive

impacts on savings were found by a deposit collection services tested in Ashraf et al

(2006a), as well as Dupas and Robinson (2009)

6

Gugerty (2007) conduct both qualitative and quantitative study on saving spending agreement where each member was required to identify in advance their purpose for pot funds when their turn is up

CHAPTER THREE RESEARCH METHODOLOGY

3.1 Methods

3.1.1 Research Instruments

This study involved the use of three research instruments during collection of data, that is, questionnaires, interviews, and focus group discussions A hundred and twenty (120) self-administering questionnaires was sent to respondents in Tajikistan, only eighty (80) questionnaires were returned dully filled by respondents Focus Group Discussions (FGDs) involved sixty four (64) participants, that is, eight groups, each with eight people Formation of groups for FGDs took into considerations norms and culture of Tajikistanis, example Muslim men and Muslim female do not sit together This study also collects first hand information from five representatives of MDOs in Tajikistan to have the perspectives of supply side (service providers) The selection of respondents in both instruments was randomly

Focus group discussion (FGD) was conducted in three locations in the capital, North and South of Tajikistan, where 8 groups with 8 people in each group making a total of

64 people were randomly selected both clients and non clients of financial institutions The exercise of FGDs was influenced by gender; age, literacy level, and exposure of participants, groups of males were more active than those composed of females, exhibiting significant participation Groups of younger females were interactive and active than that composed of older female Less interactive discussion covered about sixty minutes while active discussions went on for about two hours The purpose of the study was to have general overview/information about saving services, how low income households live, their attitudes and saving behavior towards financial institutions like banks and MFIs/MDOs The respondents’ age were categorized into two groups; between 18 to 40 years old and above 40 years old

3.1.2 Sampling Design

This study adopted the use of stratified random sampling to sample out interviewees from selected microfinance institution (MFI) in Tajikistan This method was used to accommodate heterogeneous nature respondents (employees vs customers of