Financial Services for the Very Poor - Demand Must Drive Supply

Graham,

This sentence says it all "the poorest segment, 28% have accounts, but only 10% save and only 9% borrow through them" yet as "Portfolios of the Poor" so brilliantly explains the poorest are using ten or more savings and lending tools to manage their money. In Delaware (a state in the USA) of the Latina women I interviewed about half have a savings account virtually none have a checking account and they rarely borrow from a financial institution. Yet while they scarcely use financial instituions well over a third save what for Americans would be a staggering percentage of their income in ROSCAS. Similarly in savings groups which evolved from ROSCAS 100% save and most all borrow simply by managing their own money. The profits from borrowing return to the members. These instituitons are Affordable, Accessable and Safe and are already doing what financial institutions are struggling to accomplish. See my book: "In Their Own Hands: How Savings Groups are Revolutionizing Development? www.intheirownhands.com

Thanks for the great comment, Jeff. Up to a point I agree, but there are limitations to savings groups. I work with World Renew who use a model similar to CARE's VSLA. We're finding that in some areas, the groups reach a point where without any formal banking capabilities they can't grow further. The amount of cash being held should no longer be held in a local safe box. As microenterprises grow, there is a need for access to external funding. In addition, as more countries move toward digital distribution of social payments, something additional to the savings group will become criticalk. Having said that, I do believe that in particular the financial literacy that results from membership in a savings group is a wonderful enabler for more extensive financial inclusion. So I think there is room for both models. Savintts groups are of great value in various settings, but I suspect in the long run the most successful ones will leader to fuller inclusion in the formal financial environment (whatever that ends up looking like).

Graham,

That said of the half a million savings grops now in place in 150,000 villages or so worldwide, most of them are content with the amount in their group fund and saving $.050 at a time and loans of $40 or so would never be a viable business for a financial institution. I am struck how virtually all the disucssion in these forums revolves around mobile money and extending the outreach of financial institutions when there is an vast unmet demand for savings groups that are arguably the least costly and most effective instrument for starting the process of financial inclusion. Of the 31 billion invested in financial inclusion in 2013 all of it was for financial institution building and (as far as I can see) none of it for training savings groups. Just the grant portion of that 31 billion (2.9 billion) would finance the training of savings groups with 200 million members in some 2 million villages and thousands of slum communities. On reaching this goal these savings groups would collectively mobilize and distribute 10 billion dollars every year of which 3 billion or so would be the profits from lending out their growing fund to fellow group members that comes back to them. If results similar to the RCTs on savings groups funded by Gates were achieved worldwide there would be a village wide modest decrease in chronic hunger with the greatest decrease among the poorest, building assets, more savings, increased social capital and the viral spread of the methodology into villages that did not receive savings group training. If it assumed that the average village has 1,000 inhabitants the population of these two million villages would total 2 billion inhabitants. In other words the lot of some of the world's poorest could be mitigated at least to a modest degree for about $1.50 per person merely by villagers adopting a simple structure and doing the smart work themselves of selecting members, electing offices, mobilizing savings, reviewing loans and holding each other accountable without outside assistance once the groups were trained and without a penny of outside capital invested in the groups. Indeed the evidence is that the more outside capital the groups receive the more poorly they fare.  My greatest fear for these groups is not war, drought, hyperinflation or crumbling institutions, the groups can survive all that as they are truly the cockroaches of financial inclusion, but the misguided plans of those want to impose their ideas on how they should spend their money or sabotage the groups with the siren song of loans to groups from financial institutions that  that they don't need that discourage savings and create dependency with the funds captured by the better off who all too often default bringing the group down with them.  (Individuals should take out loans from financial institutions and some banks may want to part their excess cash in banks).  It turns out that improving the lot of the poor is not as complex an undertaking as we thought if we can only get out of their way. 

The experience with SHGs in India parallels that described by @JeffreyA. In fact, organizing them has actually backfired. The CEO of a P2P portal was quoted in a recent article saying that, after seeing all the tech and branding of the portal, lenders are now asking whether their loans would be RBI-insured and whether they can get CIBIL scores (Indian equivalent of FICO) of borrowers. When they hear the answer - No and Not Available - they're reportedly pulling out of these platforms. Which is very interesting considering that the same profile of lenders has been lending to the same profile of borrowers for centuries via SHGs, without paperwork, collateral or credit scores! Unintendended, but important, consequence of organizing something that should perhaps be left alone. Like they say, the Internet wouldn't be what it is today if it was organized by some central agency!

Thank you. I have spent some time in India visiting SHGs and what most impressed me was not so much the NGOs training groups but the members of trained grops who on their own reached out to others in their village or in a neibghboring village and trained groups as volunteers.It is only necessar to train groups in every two or three villages and the ideas will spread to the others. After all ROSCAS - chit funds, tontines, tandas - spread on their own before any of us and before roads or mass communications so why sould we be surprised when good ideas spread as they always have by word of mouth and a desire to be of service. I like your reference to the internet. I see savings groups as a dumb center (we provide a few organizing principles) smart edges approach - villagers do all the hard work or organizing, saving, borrowing and holding each other accountable building skills along the way. See by book "In Their Own Hands: How Savings Groups are Revolutionizing Development" www.intheirownhands.com. 

Jeffrey, I appreciate the very important point you're making so passionately. I am a volunteer member of World Renew's Sustaining Livelihoods task force, which (among other things) works with local partners who train and equip Village Savings and Loans Associations in a model similar to CARE's. There are undoubtedly huge numbers of people who will still benefit the most from savings groups, and who may never have needs beyond that. But there is no one-size-fits-all answer. Just as you are right that putting all the energy into mobile enablement and extension of banking services is the wrong answer, I would argeu that it would also be wrong to put all our energy and investment into savings groups. When savings groups work, they make a difference to the local community - perhaps socially as much as economically. At their best, they lead to significant and sustainable improvements in livelihoods. But savings groups don't always work. They are also not always sustainable. And the ones that are most successful result in a financially literate group of people who are establishing new microenterprises, considering education for their children, and aware of the need to insure against financial shocks. I would suggest that, far from being completely satisfied to stay within the limitations of savings groups, these are the communities that may be best equipped for further services. In any case, my main point is that this is not an "either-or" discussion, but a "both-and". Savings groups may be under-invested (though groups like CARE and World Renew and many others are in fact investing significantly), but they would not be the whole answer even if they had unlimited funds.

By the way, as I should have said in the original post, the content of this blog and associated comments reflects my personal views and is not reflective of World Renew, the CRCNA, or any of its partners.

Graham,

Point well taken and I completely agree. I see financial inclusion (whiich I define as having a better way to save and borrow and manage finances) as one tool. As we learned from "Portfolios of the Poor" each family uses ten or more financial tools to manage their money. Microfinace has its role as does mobile money but so do informal ROSCAS and savings grops. My point is that some small part of the flood of money investment in financial inclusion should be invested in these groups. You like I have seen their benefits. In 2008 what became a $44 million investment from the Bill & Melinda Gates Foundaton put in place a process that grew savings group outreach from 1 to 10.5 million (probably double that considering viral replication) with many new funders helping fund this expansion. The Saving for Change program I led betwen 2005 and March 2013 grew to 450,000 women organized into 20,000 groups in more than 5,000 villages. This was achieved with a staff that only for three years grew to 209 village trainers from local NGOs. Now there are less than 20 staff working to train groups. Most all of these groups are still intact in the face of a major insurgency from the North, a massive drought and crumpling institutions. That's why I call savings groups the cockroaches of financial incusion. They surive when all else fails. For an MFI to achieve comparable outreach would require a permanant staff of 1,500 and no MFI could manage so many tiny transactions profitably. Thanks for your response.