What about “savings groups”? Many don’t include these within “microfinance,” but Freedom from Hunger does. They are part of our theory of change in the lives of the chronically hungry poor.
Aside from the intriguing example of the moneylender in the Santa Rosa (Philippines) market who doubled as a savings collector and guard, I’ve hardly acknowledged the existence of traditional savings systems, much less how modern microfinance compares in offering savings options. There is a staggering variety of both informal and formal savings options throughout the history so well documented by David Roodman (chapter 3 of Due Diligence). Such variety reflects both the strong demand and the difficulty of meeting it via sustainable mechanisms worthy of public trust, especially the trust of the poorer public who have good reason to distrust formal institutions.
In the absence of institutions controlled by true rule of law, the people we can trust with our money are those already embedded in our matrix of mutual social obligation – family and neighbors. Traditionally, the zone of trust has often been widened by creation of various forms of cooperative saving and credit associations (SCAs). The two main types have been RO(tating)SCAs and A(ccumulating)SCAs.
ASCAs are precursors of modern credit unions and also John Hatch’s original FINCA village banks. Freedom from Hunger adopted and adapted John’s model because of its encouragement of members to self-manage and to accumulate their own savings. This “internal account” enabled members to lend to themselves from their shared pool of accumulating savings and thereby augment and eventually replace borrowing from external sources.
Back in those old days, NGOs were the lenders to village banks. They had every intention to graduate the village banks to independence and move on to help more of the poor. My, how we’ve all grown gray with sophistication since then! The internal account has mostly fallen out of favor among village bankers (CRECER in Bolivia and FINCA Peru are notable exceptions) as they’ve built self-perpetuating financial institutions.
Take away the external capital in the original village bank model (with its internal account), and you’ve got an ASCA.
Create a standardized, portable model combined with systematic training and support to disseminate the model, and you’ve got a modern “savings group” program.
Naturally, Freedom from Hunger gravitated to this approach—in league with Jeff Ashe even before he joined Oxfam America. Together with the Strømme Foundation of Norway, we started Saving for Change. Freedom from Hunger saw the savings group approach as a way to compensate for limitations of the now-standard microfinance business model for reaching out into the rural areas where the chronically hungry are disproportionally common.
Here’s the question: Do poor women (vastly predominant in the membership of savings group programs) perceive greater benefit in joining modern savings groups vs. traditional groups (e.g., tontines of West Africa) vs. credit groups supported by microfinance lenders? Do these women get a better deal?
Fortunately, there is a lot of research taking place even as I write. In particular, there is a real opportunity to find comparative evidence in Mali, where Oxfam America and Freedom from Hunger are working with Innovations for Poverty Action (IPA) and the University of Arizona’s Bureau for Applied Research in Anthropology (BARA) to conduct a randomized controlled trial to gather evidence. The research design itself is not structured to answer my comparison question, but the coexistence in the same areas and even villages of Saving for Change groups, tontines, and credit and savings associations overseen by local credit unions offers a chance to get some solid evidence.
What are some hypotheses we might test with that evidence? We can build hypotheses from the following facts on the ground.
First, regarding costs, all three types of groups have about 15–30 women members and require
- frequent, regular travel to a meeting place,
- time spent at the meeting,
- deposit of a minimum of personal savings (more if they like)
- getting along with and relying on each other.
All offer the opportunity to walk away occasionally with a “usefully large sum” of money (Stuart Rutherford’s exquisite terminology), but the details of getting there vary a great deal.
- Most, if not all tontines operate as ROSCAs, meaning the chosen member takes the contributions of all at the meeting with the understanding that each member will have her chance in the rotation to get the pot and take it home.
- Modern savings groups require that the money be repaid to the common pot with interest at a rate determined by the members (who share the interest revenue).
- Credit union groups deposit their savings with the credit union and earn little to no interest on it; they get loans at reasonable rates (capped by the central bank of West Africa) but no share of the interest revenue (because they are not full-fledged members of the credit union).
Second, regarding external support (and control):
- Tontines get none.
- Modern savings groups get training and support from a local NGO agent for about one year.
- Credit union groups have support from a credit union staffer in perpetuity.
- Tontines have maximum flexibility.
- Modern savings groups agree to follow a model structure and process for at least one year.
- Credit union groups have some but limited latitude to flex within the credit union model.
In consequence, reliability of the services received by the individual members suffers most in the tontines from an idiosyncratic mix of tradition and personality and least in credit union groups, with modern savings groups somewhere in between.
Third, regarding explicit financial benefits:
- The tontine member gets what is in the pot when it is her turn to take it home.
- The modern savings group member has a relatively safe place to save; opportunity to borrow amounts limited by what has accumulated in the group’s savings pool, subject to peer approval and pressure to repay; and a share of the considerable interest revenue proportional to her savings on deposit.
- The credit union group member has an even safer place to save but less ready access to the savings; opportunity to borrow amounts from a much larger pool of savings, subject to credit union limits on loan size as well as peer approval and pressure to repay; and little to no share of the interest revenue.
Fourth, regarding non-financial benefits:
- Tontines may be fluid and unstable in membership, which limits the social solidarity benefits.
- Modern savings groups and credit union groups are more stable over time and are served (in Mali) by field staff trained to provide non-formal adult education in various topics. However, this “trusted intermediary” with an external institution is available to modern savings groups for only one year (in the standard NGO support system).
- The credit union groups have such a person accompanying them for as long as the group endures.
We can guess which type of group women prefer to join, but ultimately they must tell us. In many areas of Mali, they may not have the choice, but where they do, which do they prefer?
While waiting for their answers, I invite my colleagues who work in Mali (and others, too) to weigh in with their comments to correct this summary comparison and to offer what experience and evidence they have ready to hand.
I will suspend new posting for the remainder of the week to allow for a lively exchange (I’m counting on you!) on this topic. This also is the last post of Theme Two (“A Better Deal from Microfinance Providers?”). Then, Lynne Jarrell and I will offer a synopsis of Themes One and Two combined, a sort of evidence brief, before moving on to Theme Three (“More Profitable Business & More Household Income?”).