Picking up on the “different notion of the market” in my last post (# 76), I would like to propose a good way for the savings group movement to make its case to the philanthropic and public financing markets.
The first part of the case would be solid, incontrovertible evidence that savings group programs can facilitate large-scale financial inclusion and capability where no mere MFI or mobile phone has gone before. I use the word “mere” in the sense of “being nothing more than what is specified.” That is, savings groups can help people, especially the poorest quintile or two quintiles of the population, in places and ways that financial institutions and mobile phone banking cannot do on their own.
The second part would be to show that durable existence of these groups also can facilitate access to other vital services and information regarding livelihood, health, food, shelter and other essentials of the good life as local people, especially the bottom quintile or two of those people, define it.
The third part would be to demonstrate that investment in the massive replication of savings groups has a relatively low cost-to-benefits ratio—the benefits being those shown in parts one and two. We cannot yet claim to have incontrovertible evidence of these benefits, but I do believe the emerging evidence is as at least as good as the evidence of the benefits of alternative approaches, be they financial institutions and mobile phone banking or whatever. That is small comfort, however, because the benefits of all options seem pretty modest in the absence of a growing economy. Therefore, the cost has to be pretty darn low to generate a competitive cost-to-benefits ratio to persuade the “investor” grants manager/civil servant who has other options for allocating money. If we have good evidence from part one and some evidence from part two that savings group programs can do things that cannot be done otherwise for the same cost, we have a persuasive case.
Here is a thought experiment to compare the cost of savings groups to credit groups. This is just a starting point to show how one might build a cost-comparison of savings groups with alternative approaches to serving the same people in need.
In general, savings groups are started by agents of the facilitating agency and supported by them for about one year (completing a full cycle that terminates in “share-out” of the accumulated savings and earnings of the group, usually followed by a new cycle). Credit groups are supported by an equivalent credit officer continuously for the life of the group, allowing many more years of support and access to other financial and nonfinancial services that may be provided or facilitated by the microfinance provider. Thus, savings groups don’t usually have access to as many benefits for as many years as credit groups may have.
On the positive side of this difference in accompaniment of the groups, the cost to the local provider per person-year of participation is much lower for savings groups than for credit groups. Here’s my reasoning. Assume the facilitating agency provides the services of a facilitating agent for one year and then no more services to the group (usually there will be some follow-on assistance but not necessarily). If so, the facilitating agency will generate person-years of participation (and presumably net benefit) calculated as the average number of group members times the duration (in years) of the group, all for the cost of one year of facilitating agent time and allocated costs of recruitment, training, supervision and support of that facilitating agent. In contrast, a group supported by a microfinance provider requires accompaniment by a similarly expensive credit officer (usually more expensive, because of the greater responsibilities and required skills and supervision) for every year the group exists. True, the credit officer typically will spend less and less time each year with the group as the years pass, but some significant financial outlay by the microfinance provider must continue. The difference in cost per person-year of participation widens in favor of the savings group program if there is spontaneous replication of new groups by members of groups formed by the facilitating agency (which usually happens).
If in fact savings groups will be formed and maintained by people who for the most part cannot or will not participate in the services offered by microfinance providers, and if in fact the facilitating agencies that help savings groups get up and running have much lower cost per person-year of participation than credit groups, then philanthropists and government agencies ought to find savings group programs very attractive for deployment of their limited funds.
This comparison should be theoretical, because philanthropists and civil servants should not be investing in credit-led microfinance providers, since they now can benefit from “the magic of the marketplace,” and anyway, they are presumed not to benefit the target population. The more apt comparison would be with some other development interventions that are typically supported by donors and governments. That is a bridge too far for me to cross here. But it seems very likely that savings groups would be more attractive than many other development interventions that are more costly per person-year of participation. Perhaps more interesting is the prospect that savings groups that expand financial inclusion and capability can also reduce the costs of other development interventions by creating a network of service-delivery points that often may actively collaborate with service providers (financial and nonfinancial) from outside the local community. Therein lays the “market” and “business model” for savings group facilitating agencies.
Savings Groups at the Frontier and Beyond Financial Services reveal many opportunities for a savings group program to be a complementary service offered by facilitating agencies that primarily specialize in a nonfinancial sector, such as agriculture, health, literacy, enterprise, even social protection and disaster recovery. Delivery of services through groups is a long-standing tradition in many sectors; organizing these groups as savings groups provides more and complementary benefit to the group members and enables the groups to become more effective partners with the local service provider. There is opportunity for a facilitating agency, regardless of its own history of sector specialization, to become a generalist broker between a network of savings groups the agency has facilitated over a few years and local service providers seeking access to viable, collaborative community groups.
There is even ample opportunity for commercial financial-service providers to offer a savings group program as an additional line of service, effectively recruiting potential customers for their other, profitable products or lines of service. I’m not solely referring to the idea of “linkage” of established savings groups to financial institutions that were not involved in their formation. It is quite conceivable that a financial-service provider that does not have a license to take and intermediate savings deposits could offer its clients a well-organized way to save and meet their shorter-term, smaller borrowing needs by helping clients organize themselves into savings groups. The benefit to the provider would be indirect, since the savings could not be intermediated by the provider. The most probable benefit is the improved competitive position gained by adding value to the overall service menu offered to clients. In effect, this is what was achieved by the original village banking design that encouraged members to form and operate an internal fund composed of their savings from which they can borrow shorter-term, smaller sums at the same time they are repaying their “program” loans from the local microfinance provider —a savings group within a credit group.
As long as there remains a substantial market fueled by philanthropic and public financing in search of net-beneficial programs to support, programs that cannot be commercialized for the private-sector market, as standalone savings group programs seem to be, I would say there is a solid business case for savings group programs. If you think this is a misapplication of the term “business case,” think for a moment of all the charities in operation around the world. Many of them, like Freedom from Hunger, have survived, if not thrived, for decades, often longer than the average life span of the typical commercial business. They are so durable only because they have developed and evolved a viable business model—they are “sustainable.”
My former colleague, marc bavois, now with Catholic Relief Services (CRS) in East Africa, points out that my argument begs the question: Where’s the money? Some major brand name international NGOs (notably CARE, CRS, Plan and others) have shifted from supporting credit-led institutional microfinance to savings-led microfinance through savings groups, but their philanthropic/public markets have not followed with long-term grant-making programs. Another colleague, Laura Fleischer Proaño, Freedom from Hunger’s Director, Savings Group Methodologies, reminds me that savings groups were never fully accepted in the microfinance/financial inclusion circles, which focus on the formal financial service providers. She predicts that savings groups are more likely to find a welcome mat in community development circles that have a broad range of development goals that savings groups can help meet.
In short, the business case for savings group programs is not appealing to funders looking for something similar to the credit-led business case. This does not mean the savings group programs don’t have a strong business case, only that they have not yet penetrated the right funding markets and articulated their business case in the relevant language and concepts of those markets.