Saving up’, or setting money aside until it grows into a usefully large sum, is hard to do. An alternative is to ‘save down’ – to set money aside to repay a loan rather than build a pot of savings. A loan is, essentially, an advance against future savings, and for a number of reasons saving down (borrowing) can help ensure that those savings really are made.

Somehow I missed this excellent blog post by Stuart Rutherford from a few months back.  He argues that “saving down” (i.e. borrowing and repaying a loan) has a variety of advantages in low-income contexts, although many people prefer to save rather than be indebted with a MFI.

First, borrowing provides you outside help with the discipline you need to make the savings, since the lender has a strong interest in getting you to (re)pay and will take steps to make sure you do. Second, with a loan you get the lump sum up-front, so borrowing provides you with certainty that the lump sum that you will build through saving is indeed created, and not lost, stolen or blocked. Third, borrowing is timely: you get the lump sum now, when you need it, not after a laborious and uncertain saving effort.

He takes the example of SafeSave, his project in a slum in Bangladesh

SafeSave clients borrow-and-repay much more than they save-and-withdraw. Why?

Many clients tell SafeSave researchers that they’d like to save more and borrow less: it’s less stressful, cheaper, provides a greater sense of security, and lump sums formed that way don’t need to be repaid. But they constantly fall into a liquidity trap. They save, but when the next urgent spending need arrives their accumulated savings aren’t enough to satisfy it, so they borrow. Now, with the need to make repayments added to the constant pressure of regular expenditure, their capacity to save is constrained even further, and so the cycle deepens and repeats