When advocates of credit- and savings-led microfinance dialogue about “sustainability,” they talk past each other. Each side means something different when they use the word. They focus on different units of analysis—the financial service institution vs. the savings group. Though a small amount, revenue for savings-led microfinance may be generated from the savings group members to support fee-for-service trainers; however, this is not the revenue that sustains the savings group program—the facilitating agency as it is labeled in Savings Groups at the Frontier.
Is there a business case for savings-led microfinance (specifically savings group programs) that is at all comparable to the business case that has been made in Theme Seven for credit-led microfinance (specifically village banking)? Not if we insist that both sides define sustainability in terms of revenue generated from clients or members and captured by the facilitating agency.
Levels of Analysis
There are three levels in the institutional structure of both credit- and savings-led programs. First is the client or member (and their groups). Second is the local service provider to the client/member level. The third level is more variable and less visible: call it the “investor” level, in the broad sense of one or more persons or entities that have separately or together created, supported and/or funded the local service provider—they are “invested” in the success of the local provider institution.
In the dialogue between savings- and credit-led advocates, both maintain that clients receive services from an “institution.” For savings group advocates, the group is the institution, but it is composed of members who answer to no one but each other—there is little or no flow of money from the group (first level) to a provider institution (second level). For the credit-led institution advocates, money must flow from the first to second level for there to be any chance of sustainability at the second level, especially when the third level requires a return on its investment at the second level.
A Different Definition of Sustainability?
The Savings-Led Financial Services Working Group of the SEEP Network acknowledged that discussion of “sustainability” in savings-led microfinance (savings group programs) must focus on the savings group and its durability. Here are some important quotes from their report of a February 2010 online conference:
Overall, the group determined that rather than focusing on cost recovery as is common of credit-led programs, sustainability in savings-led microfinance refers to the ability of the system to ensure ongoing provision of core financial services beyond the initial intervention. In other words, sustainability requires independent group functioning into the future with no external support. And although sustainability may be defined at different levels of program operation, the discussion during the conference focused on the core unit of analysis: The savings groups.
This makes sense. The more generic meaning, the essence, of “sustainability” beyond the world of credit-led microfinance is durability. Proponents of savings-led microfinance focus on the durability of the savings groups—“beyond the initial intervention” and “with no external support”—not on the facilitating agency.
The SEEP working group came to three conclusions:
- Sustainability requires ongoing access to core financial services without external support for a period during which the group must regenerate itself at least twice.
- Sustainability requires a state of stability of service provision, but does not presuppose growth.
- The provision of additional services through continued external support does not undermine the sustainability of the group to carry out its core financial activities.
These statements require a bit of explanation. Some of the SEEP Working Group participants maintained that “core financial services” just mean savings while others insist that it must include credit as well (loans to members from the accumulated savings, which earn interest for the group). The “provision of additional services” refers to both financial and nonfinancial services that an external agency (MFI, bank, health agency, agricultural extension service, etc.) might provide to the group, while the group continues to provide its members with the core services around which the group was originally formed. In general, savings groups are organized in cycles (often of about one year) that terminate in “share-out” or distribution to the members of the accumulated savings and earnings of the group. If the termination and distribution are followed by a new cycle, the group is said to “regenerate itself.”
If anything, savings groups are likely to be more durable than village banks or credit groups in general. Studies of savings groups that were started many years before (Fleischer, Gash and Kuklewicz for Ecuador and Valley Research Group and Mayoux for Nepal—see also Ashe and Parrott for Nepal) have shown the durability of such groups without external support—not just that they continue to exist but they continue to be effective in delivering financial and other services to their members. Almost by definition, village banks and similar credit groups are forever creatures of the second-level service providers—their durability is totally a function of the service provider’s sustainability.
Notice that the SEEP working group acknowledges the importance of self-maintained durability—“with no external support.” Just like the credit-led financial service institution, the savings group is sustained by the money and actions of the end users of the financial service. The difference is that the “self” that is maintained is at the second level (financial service institution) for credit-led microfinance and at the first level (savings group) for savings-led microfinance. In effect, the SEEP working group has applied the same definition of sustainability as the proponents of credit-led microfinance, but could not apply this definition to the same level of the program structure. The working group artfully ducked my original question:
Is there a business case for savings-led microfinance (specifically savings group facilitating agencies) that is at all comparable to the business case that has been made in Theme Seven for credit-led microfinance (specifically village banking institutions)?
This is the topic for my next post.