Connected Savings, Would That It Were True...
A recent post mentioned the idea of connected savings. Groups are part of a world of connected savings for two reasons.
First, they spread the financial system to its most distal points. If arteries and veins (think links among banks, insurance companies and investment houses) form the main pathways of a financial system, savings groups pool money at the end of the capillaries, keeping the system fresh and alive.
Second, they deepen the financial system, turning unnatural scrimpers (those who lack the savings instinct) into stockpilers, forcing them to squirrel away their cash in clubs that churn with goals, incentives, ingenuity, transparency and self-discipline. This life-giving energy feeds back along the financial circuitry into the heart of the system.
Only if this were true.
As it stands, groups are not that good, at meeting short term needs (helping a saver save for a regular monthly bill) or long term needs (helping a saver save for retirement). But it’s not just their groupiness that limits them, it’s something else.
Let us return to Doña Santos for a moment. She has long-term savings goals. For a group such as hers that has surplus cash in its lock box, it faces a crude selection of long-term investments. It can distribute its fund (leaving members to decide how to transport their cash to another investment or to just spend it); it can invest in collective enterprise (risky and awkward for members who want to save, not run a group business); it can lend to members for long term purposes like the purchase of a home, land or cattle (awkward for members who don’t want to be stuck in the group while another member pays off her ten year loan), or, what?
It could invest, or at least facilitate the investment of its members, in long-term financial instruments. These opportunities are now offered in places like India, Kenya, South Africa, Brazil and the U.S., with accounts designed for very low-income individuals and a few offering options for groups. More opportunities will surface as central banks jump on the financial inclusion bandwagon.
But, today, to move surplus cash from a group’s lock-box into safe, regulated securities, where those securities do exist, is a risky, disconnected process.
What blocks the effortless transitioning from cash-based opportunities to secure, long-term investments? Cash. Though pleasing as a budgeting tool, cash is a source of financial friction. Cash is liquid but not liquid enough.
Moving cash from one place of safekeeping to another, is expensive and not automatic. That it is not automatic locks savers out of long-term opportunities where investments either require or at least inspire regular top-ups (see Systematic Investment Plans in India as an example). In a world of connected savings, cash must go. But, don’t take it from me. The next post written by an expert poses a more fluid world of savings connectivity.