Forget microcredit: microsavings work much better

Update: Jeff Ashe responds in the comments section to some excellent comments from readers Microcredit has been getting a bad press recently – criticised for eye-watering interest rates, high indebtedness levels, and excessive hype Jeff Ashein terms of its development impact. Oxfam America reckons it has a much better alternative – helping poor people to save first and then borrow. Last week, I interviewed Jeff Ashe (right), who runs Oxfam America’s renowned Savings for Change initiative. Here are some key points: What does SFC do? The methodology turns traditional microfinance inside out. Instead of creating vast institutions, SFC trains groups of women in how to run basic savings groups and then gets out of the way and lets them get on with it.  How do SFC groups differ from the traditional community rotating savings and credit associations (ROSCAs) in most parts of the developing world? ROSCAs typically consist of a group of women putting in the same amount every week, and taking it in turns to receive the pot. SFC is more complex –women elect their own officers, write their bylaws, keep records and meet weekly. The big difference from ROSCAS is that members can take out loans when they need them, choose the amount they want and then pay interest. Savings plus a share of the interest income is then distributed to members when they most need the cash, between the planting and the harvest. The return on savings in Mali runs at 30% or more every year. How many women are involved? That’s the astonishing part. The scheme has gone viral and now reaches 560,000 women in 5 countries in Africa, Central America and Asia. Mali is the biggie, with 400,000 women involved in about 4,500 villages. According to Jeff, who has been working in microfinance since 1980, ‘this dwarfs anything I’ve worked in.’ A number of other NGOs are engaged on similar schemes, probably reaching about 5-6 million people in total, mostly in Africa but with increasing numbers in Latin America and Asia. How much does it cost? Jeff puts the cost at about $20 per woman, compared to $200 of start-up costs per borrower for typical microfinance institutions, and $12,000 per household in a Millennium Village. What’s the impact? SFC has been heavily evaluated, with a big randomised control trial currently under way in Mali (let’s hope that isn’t messed up by the current political upheaval there). Although the RCT result won’t be ready until early next year, other research shows: –          Income smoothing, e.g. over the course of the crop cycle, leading to improved food security –          Women acquire greater voice in household decision-making and (to a lesser extent) within the community –          The savings groups report that they value the increased solidarity and mutual support as much as the actual savings – this is an exercise in social capital accumulation, and likely to lead to wider benefits in terms of women’s organization. SFC imageWhat happens when the funding runs out? We’re about to find out. The Gates Foundation has been funding animators and local NGOs to deliver training packages, and that money is now coming to an end. According to Jeff, conventional donors and microfinance institutions don’t like the lack of institutions or technology (they keep urging SFC to be trendy and adopt mobile banking). So we will now see what happens when the savings groups are cut loose (Oxfam America will try and at least find enough money to keep monitoring impact). Jeff has already seen what happens when the funding gets cut. He got the original idea for SFC when he stumbled across a USAID-funded scheme in Nepal run by an INGO called PACT. There too, the scheme had gone viral. ‘I was stunned – day by day all my preconceptions collapsed; microfinance shibboleths fell crashing to the ground. Poor people can save; they will repay their loans, external loans are not needed, the savings groups will start a movement.’ Bizarrely, USAID decided to cut PACT’s funding and invest the money in hydro projects instead, so the savings groups were abandoned. When a researcher went back eight years later, she found that two thirds of the original groups had survived, and new groups had formed, bringing the numbers back to those at the time the project had ended. The average number of women had risen from 22 to 26, and the average loan fund had quadrupled in size. Which in terms of the evolutionary model discussed previously on this blog, suggests that these schemes are a fit variant that is likely to survive and replicate. Jeff is confident – ‘I want to watch where it goes, how it develops’ (see previous post on the positive deviance emerging in the scheme). Too good to be true? I ask him what the main criticisms of the scheme are and he lists a few:

  1. It’s not adding much, merely repeating the ROSCA system (see above on that one)
  2. The amounts saved, an order of magnitude smaller than microcredit loans, are too small to make a difference (according to the evaluations, not true, especially for income smoothing, but hopefully the RCT will nail that one)
  3. It’s not really financial inclusion because no new institution is being created (that sounds a bit silly)
But he is a man with a mission, and probably not the best source to criticise his baby – any other doubts/concerns? Last word to Jeff: ‘In 1980, I helped establish the framework for conventional microfinance, working in Latin America for Acción. That evolved into regulated financial institutions, including Compartamos. I would love to just out-compete them on savings groups – I love that kind of stuff!’]]>

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12 Responses to “Forget microcredit: microsavings work much better”
  1. I was fortunate enough to work on the Gates Foundation grant that funds some of this and I am a big fan of and Jeff’s work and of Saving for Change. I think the interesting thing for those of use working on providing shelter solutions through savings to consider is whether there is a scale case to be made in working with these small, informal groups (which, perhaps not so incidentally, tend to work best where there are not banks serving low income people). From my perspective, we can get more scale per unit of input (training, marketing, evangelizing…) by working with the larger, formal savings institutions – and at less risk to the homeowner (I know Jeff is shaking his fists right now). That being said, there is power in these local community groups beyond their capacity to save and borrow. In Nepal I am very impressed by the local communities ability to manage both saving and construction projects for families in their communities. So I am intrigued by the possibilities. I would love to see a pure informal savings model tied to quality home improvement. Any takers?

  2. Penny Lawrence

    S4C builds resilience and works as social protection too……. I’ve just visited drought affected acommunities in Western Mali where a Savings For Change group set up 3 years ago near Kaye is still operating. The women reckoned they would not need aid because they could divert their savings, or sell their assets that they had purchased with the loans. The self esteem this generates is inspiring! Well done to all involved!

  3. Going back to old ways and spinning it to fit the current trends works. microsavings work much better credit for very 3 simple reason; time, training and discipline inbuild before beneficiaries gettng loan.

  4. Mohammad Pournik

    Duncan you might also want to look at the experience of a regional project implemented by UNDP in South Asia in the 1990s that I had the honour of being associated with. The South Asia Poverty Alleviation Programme (SAPAP) had also at its core a group managed savings based microfinance programme, but was also focussed on linking the organized communities to service providers including banks and extension services. That programme also confirmed that the poor can save and that the discipline generated through a credit programme run from own savings then would qualify them to even act as agents for banks. An interesting model worth reviewing. UNDP support to this project ended in 2003 and almost 10 years on it would be excellent if some funds could be mobilized to revisit the project sites to see what has happened to the initiative since. I know that the operation in India has continued and been expanded through a World Bank loan and is now being taken to scale nationwide. I am less certain about the current situation in other countries.

  5. Aderemi Aibinu

    Village Saving and Loan Scheme :A Catalyst for Women Economic Empowerment in Liberia;UNDP Liberia under its Community Based Recovery and development (CBRD) programme implemented a VSLA programe aimed at adding value by facilitating community level access to sustainable financial services. This is achieved by improving the organizational capacity of village level community woemen groups and providing the necessary knowledge to provide community level services by creating opportunities for the provision of savings , loans and insurance facilities. This initiative also created opportunities for creating linkages with external financial intermediaries and outline a conceptual framework for linking financial inclusion and community development initiatives.The Lessons learnt from the inroduction of VSLA in Liberia showed an increased access to financial services especially for women is an effective catalyst for a more active participation in the decision making and development processes at community level. It enhances economic empowerment of communities, by assisting low income persons in accessing the capital necessary to initiate small businesses and or asset accumulation through savings that would ultimately assist in building their livelihoods for both their families and their communities.

  6. So glad you met up with Ashe during your trip to Boston. I’ve spoken to him and others involved in the SfC program, and I feel it is very well done and has evolved with the times and contexts. However, it has its flaws, as many projects do, but at least Oxfam US (for the most part) is transparent about their mistakes.

  7. Savings is older practice of people of Bangladesh. For savings, people particularly youths formed associations and clubs. They provided loan to the members and non-members from their savings for expanding the savings. When a amount of money saved, the divided it to its members and most of the time, they quilted the association. It happened due to absent of longer vision and a visionary leaders within the association.
    The case study is inspiring and I think, it is needed to develop a clear vision and visionary leader within the group to sustain and continue the saving activities.

  8. Christine Svarer

    Great article Duncan, at CARE we too whole heartedly agree that no one is too poor to save. CARE first developed Savings and Loans Associations in 1991 in Niger. Today more than 200,000 women In Niger have collectively amassed more than $14 million (£8.9m) in savings, and Niger isn’t exactly a hot bed of economic activity.
    In 2008, CARE launched ten year programme called Access Africa which aims to provide basic financial services for 30 million of Africa’s poorest people – at least 70 per cent of whom will be women. We have seen the popularity of savings groups spread rapidly through communities. Among other methods CARE trains established small business owners to work as franchisees to spread the word about saving and loans groups. One woman, Judy Angaya who runs a shop selling childrens’ school books near Kisumu, Western Kenya was responsible for the creation of 276 groups in just 18 months. That is an incredible 7,552 people now in a savings and loan group.
    Similar to Saving for Change, our Banking on Change partnership with Barclays and Plan UK has provided basic financial services to over 230,000 of the world’s most disadvantaged people through the formation of over 11,00 savings groups in 11 countries. These groups, have collectively saved over £2.5m and 128 savings groups have now opened bank accounts with local Barclays branches – linking them to the formal financial sector.
    No more than the hype that once surrounded microcredit, we recognise that savings on their own are not a panacea and that if we are to really achieve broader financial inclusion for the 2.5bn that are currently excluded we will need to look at a holistic package that provides credit, insurance, savings, technology and perhaps most importantly of all financial literacy.
    Christine Svarer
    Head of Private Sector Engagement at CARE International UK

  9. Jeff Ashe

    Jeff Ashe here, responding to these excellent comments on Saving for Change.
    Patrick McAllister:
    You raise an interesting question about the frequently touted advantages of working through larger institutions. The abysmal performance of SACCOS in East Africa with rampant fraud, lack of transparency and simple incompetence is illustrative of an important point. With a Savings Group transactions occur in the presence of all the members. Even though these groups are unregulated and there is no legal recourse, fraud is virtually nonexistent and loan payment is close to perfect. It is their money they are managing after all. I have come to believe that Savings Groups (when properly trained) are safe as are large, well-managed and regulated institutions. It’s the middle-sized financial institutions that are problematic. When several Savings Groups pool their money in a common fund to be managed centrally abuse is far too common. Small cooperatives are also problematic.
    ‘Save then spend’, that’s the motto. With a loan you “rent” money for a period of time – let’s say $200 for a year – and then pay back plus another $60 for interest. If you save $4 per week in a Savings Group you have $200 of your own money at the end of the year that you can use as you see fit plus access to the group’s fund for small loans. On top of that you receive another $60 or so as your share of the interest paid by members take out loans from the group fund. Then there is access to emergency loans and the growing social capital of working together. No wonder Savings Group are popping up even in villages that are awash in MFI credit (although they use MFIs for their larger loans which presents the case for effective linkages). Not only are the groups more profitable, but no collateral is at risk, there are no forms to fill out and no bureaucracy to contend with.
    Kenny Roger
    Capacity building is what we are about. Solidarity and mutual assistance are rated as high as access to loans and savings and then the group learns how to save and borrow and start a business with the encouragement of peers. I want to know what is going on in the minds of the adolescent girls who are seeing their mothers commit revolutionary acts of determining their own destiny in their savings groups every week.
    Penny Lawrence
    Saving for Change and resilience. I like your example from Mali. Not only do the groups have money and economic clout, but a lot of them invest the money that is not already out as loans in the purchase of bags of grain which they can draw down on or sell during the drought. With the drought and the coup in Mali these groups are going to be even more important.
    Time, training and discipline about sum it up.
    Mohammad Pournik
    Thanks. The UNDP program in South Asia sounds fascinating. The linkage to banks is a next step we want to take but how to do so effectively is the question. The partnership needs to benefit both the groups and the banks. The SHG Bank linkage program in India administered through NABARD – the National Bank for Agriculture and Rural Development – is a good example and has become by far the largest microfinance initiative in the world – ten times the size of Grameen. (Groups with 65,000,000 members are linked to thousands of local banks.) The key is decentralization – NGOs train the groups and when they need more capital they go to a local bank. The rule is that the banks don’t take the group’s savings as collateral and don’t give the groups more than four times what they have saved. (Of course by flouting its own rules the program has gotten into trouble.)
    Aderemi Aibinu:
    This example from Liberia is exciting, showing how the groups once they are organized and trained can access other financial services. Oxfam America and Oxfam Great Britain are going to take Saving for Change to Liberia.
    Travis Warrington:
    Thank you for appreciation of our transparency. I wrote this little Haiku for myself: “Trying to change the world he found it more difficult than expected.” It’s a challenge to pull off a successful program.
    Charles Arthur:
    Milford Bateman and I have had long discussions about this. He is a fan of savings groups and initiatives that finance and help businesses with a big potential to generate jobs and income. He finds microfinance, especially in Eastern Europe, guilty of the “infantilization” of the economy. But I had a great time designing an MFI for Bosnia that gave out microloans.
    Jeff’s final word:
    Saving for Change, which is carried out jointly by Oxfam America, Freedom from Hunger and the Stromme Foundation, is a fairly simple and concrete intervention that reaches huge numbers at minimum cost. It nudges along positive change in poor women’s lives in ways that are reasonably predictable across cultures, literacy levels etc. We are not talking about poverty eradication here (as if anyone is really doing that). My hope is that using SfC as a starting point we can broaden the approach – it takes about two years for the women to work out the mechanics of running the groups and then start asking “what’s next?” – adding other components to the basic structure. But how to do this in a way that is simple, mass-scale, virally self-replicating, locally controlled and that works? What can you do with $3 per villager? It costs about $1,000 dollars to train groups that incorporate between 50-100% of the women in a village of 1,000 inhabitants. ($1 per villager). We figure it costs another $2,000 or so (the remaining $2) to provide additional training and linkages to other development efforts for agriculture, leadership, business, association formation, advanced training for the groups. The $3 per villager provides training and support over five years. This is a lot cheaper than the Millennium Village approach but of course a lot less comprehensive. And it is a lot more replicable because it can be carried out by NGOs of normal capacity and is so inexpensive that it could have national impact. SfC is already operating in a third of Mali’s villages – 4,500 out of 14,000.