The Economist points out this week that many big donors are starting to focus on the savings side of the microfinance equation. I think they overlooked the challenge of regulating and insuring microsavings. It is easy to use a light touch when regulating microlending. As long as terms are clear for borrowers and basic consumer protections are in place, the market will guide interest rates and competition will encourage efficiency. If a microlender goes out of business, there will be fewer loans, but nobody loses any money.

The same cannot be said for microsaving institutions. Except for a few of the largest, MFIs tend to concentrate on certain geographic, demographic and industrial populations. This leaves them highly vulnerable to economic shocks. If MFIs want to use microsavings as part of their lending capital base, they will have to find a way to insure those deposits in the event of a run on the bank or an economic shock that significantly hit repayment rates.With such concentrated saving and borrowing bases, I would think premiums would be particularly high.

Establishing an effective regulatory and deposit insurance framework in countries that have struggled to establish even a basic credit rating system to protect microborrowers from predatory lending and over-indebtedness seems a lot to ask. Whether or not MFIs can profitably take savings and pay insurance premiums, I don’t know, but it seems like one of the biggest hurdles to widespread and effective microsaving.