A Different Notion of “the Market”

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)?

Referring to my last post (# 75) and its three levels of program structure (client, provider, investor), my question resides at the second level—the local service provider. Can the local service providers who start and support savings groups keep at it long enough to achieve major scale of outreach? At the heart of this question is this: Where does the revenue to sustain the second-level effort come from?

Who pays the local service provider?

Chapter 3 of Savings Groups at the Frontier (by Paul Rippey and Hugh Allen) describes current experiments to see whether community-based trainers/facilitators of savings groups can be sustained in their work by fees charged to the savings groups they train and support. This may turn out to be a dependable, lower-cost alternative to employing regular staff to do this work. However, it is unclear that these community-based workers will remain active, motivated and committed to quality service without ongoing supervision and support from a local service provider or facilitating agency (see Paul’s further insights on this topic here and here).

Even if the community-based workers continue on their own with high motivation and quality performance, a facilitating agency must be paid to recruit and train enough of these independent facilitating agents (allowing for non-performers and attrition) to form and support large numbers of savings groups. If these local agents must continue to depend on support from the facilitating agency, this approach still promises to lower costs for the facilitating agency. But it would not generate sufficient revenue to sustain the agency. Throughout Savings Groups at the Frontier, I detect no intention or expectation that a facilitating agency would generate enough revenue from savings group members to sustain growth to achieve a large-scale portfolio of successful savings groups.

A Different Notion of “the Market”

The fact is that the facilitating agencies currently, and likely will continue to, depend on grants or contracts from third parties, be they private philanthropists or public agencies. In the microfinance world, this dependence is dismissed as “unsustainable,” but what it really means is that such programs are not sustained directly by the end users themselves as in a normal market for goods and services. The word “market” is typically reserved for the private, for-profit sector, but it is another hard fact that there are very large markets for philanthropy and public financing—not as large as the private-sector market, at least in developed economies, but large enough to sustain a great many service programs at very large scale. These markets tend to be driven more by supply of money and ideas from philanthropists and governments than by demand by end users for services and support, which causes waste and distortion of these markets. It doesn’t have to be like that. Attentiveness to what people need and want can lead to rational allocation of the money in these markets. If people clearly want and need “financial inclusion and capability,” philanthropic money can be well used to find specific ways to respond, and tax money can be well used to take successful response models to major scale.

Imperative to Demonstrate Net-Benefit for Those Outside the Commercial Market

However, the markets for philanthropy and public financing are not as large and efficient as the private-sector market, so there must be a very good reason to depend on these markets rather than on the private market—that is, the particular wants and needs of particular people cannot be met by the private market.

In short, to justify growing and sustaining a business model at large scale by philanthropic and then public funding, the publically subsidized savings-group approach needs to be demonstrably superior to the market-driven, credit-group approach in reaching and meeting the wants and needs of at least some important segment of the national population. This means the bottom quintile, if not the bottom two quintiles, of the population in relation to household wealth and well-being.

The evidence is mixed and inconclusive still. I’ll drill deeper into this evidence in Theme Nine after carefully reading the report of the randomized trial plus qualitative study of savings groups in Mali. Meanwhile, you can read the full report yourself or a summary of results provided by Oxfam America and Freedom from Hunger.

We know for certain that savings groups can be and are being formed and maintained in rural areas beyond the reach of the business model of market-driven microfinance institutions. Moreover, Chapter 2 of Savings Groups at the Frontier (by Susan Johnson and Silvia Storchi) indicates a variety of marginalized people live in areas served by microfinance institutions, but prefer to join savings groups. They do so either because of the explicit and implicit costs of the commercial microfinance products and services, because of the explicit and implicit benefits of savings groups or both.

In my next post, I will propose a way to build a business case for savings group programs from the evidence we have at hand.