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

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



i

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.




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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.

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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


iv

4.6 Factors that influence the usage of savings services from financial institutions
24
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












v

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

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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

1

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


2

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,
3

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 general
1
.

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
.


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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.
5

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

1.6 Research Questions
The study focused on providing the answers for MFIs position towards delivery of
savings products in Tajikistan, thus, the guiding research questions were:
1) What does the MFIs in Tajikistan offers as savings products for the poor

households?
2) What are the factors that supports or constraints poor households (or micro
and small entrepreneurs) to access/ enjoy savings services from MFIs in
Tajikistan?
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).

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CHAPTER TWO
LITERATURE REVIEW


2.1 Microfinance services and poor communities
Microfinance, according to Otero (1999) is “the provision of financial services to low-
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
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.”
7


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 non-
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.

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.


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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).
9

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


10

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).

11

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 “cost-
effective savings mobilization strategies that respond to different client needs” (Bass
et al., 2000).
Similarly low-cost saving products that are easily accessible (opening
hours and proximity), secured with positive returns (interest) and more attractive


12

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 micro-
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)

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
13

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

2.5 Empirical Evidence
Empirical evidence has shown that around the world poor households save in various
forms and for various purposes. General they are willing to save part of their income
if appropriate financial institutions are available. For instance Shipton (1992) provide
evidence on the use of lock boxes in the Gambia. Rutherford (1999) also cites
several commitment devices that villagers in East Africa use to stick to savings plans,
including “buying a lock box and throwing away the key” and the use of “money
guards” in which individuals hand over their savings to someone else that they trust
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 so
4
. 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.



14

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
.

15

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