How can we encourage poor people to save?

The Guardian
By: Faisel Rahman
Wednesday, September 22, 2010

Somali born Husnera meets her group of five other women each month and hands over £100 in cash to the group leader. Every 10 months or so she gets £1,000 back, which she considers holiday money for her family. She calls this a hawa group and has been a member for three years. There are variations in most communities, pardner in Caribbean communities, kommittis in Pakistani ones. Savings arrangements are completely informal and unregulated, money is unprotected and generally no interest is offered; but the schemes work and are popular in part because, as Husnera tells me, they are simple, easy to use and set up with people you know who live in your community. Most important, she says, is that she can't access her money for 10 months.

Christmas savings clubs work in a similar way. Money is locked away till the end of the year and can only be used in a limited number of places. Money is collected by local agents who earn a commission.

The debacle of 120,000 people losing most of their savings with the collapse of Farepak in 2006 revealed that, contrary to popular belief, poor people save. It also uncovered the fact that their savings were almost completely unprotected. Now, following the introduction of a code of practice and an industry trade association, Christmas savers should be protected, and the schemes are still popular.

Much to the annoyance of the government, UK banks have shown a complete disinterest in targeting poor communities or designing savings products to suit their needs. One bank official explained the reasons why succinctly: dealing with small amounts of cash is just not a viable proposition.

Nationally, there is precious little good practice or good partnerships documented on how to promote savings among poor communities, although the Institute for Public Policy Research thinktank and Bristol-based Personal Finance Research Centre are hoping to change that with work in the new year.

Credit Unions seem a good solution but, even after many years of government funding and growth, membership still only represents 1-2% of the population. And while many are community focused, the business model of the few successful ones rely on raising savings from more affluent members to build a sustainable base, rather than from low-income groups (most members are employed and have a mortgage).

Government priorities in this area have so far seemed skewed. Encouraging savings across all income groups is important, but even more so with the poor as a lack of savings and assets often leads to the use of expensive moneylenders. In July, the Savings Gateway was scrapped. It was specifically designed to match the savings of low-income earners with 50p for every £1 they saved. The annual cost of £100m was considered too high in this age of austerity. But tax relief for Isas and pensions is estimated at around £15bn a year, with around 70% of that benefit going to people earning more than £50k, campaigners point out.

Building a successful savings culture will require input from communities, charities, banks and the government. This week, I am at a conference in the US where this seems to be happening. America already has a Savings Gateway equivalent, and banks and communities are actively engaged with each other in promoting savings.

I will be on a panel that will be giving an award to Citibank, which has invested billions in financial literacy, designed new products for financially marginalised people, supported microfinance in the US, and built savings programmes in thousands of schools and colleges across the US. Reading about Citibank's level of engagement with communities, partnerships with charitable foundations and support for government initiatives, I am at a loss to find anything comparable in the UK.

I ask Husnera if we can help her to open a savings account. She smiles and tells me she has two bank accounts already but only trusts her hawa group to protect her savings.

• Faisel Rahman is director of Fair Finance, a financial inclusion social enterprise.