Savings Groups: Alternative or Complement to Microcredit?

At a USAID-sponsored event this September, Kim Wilson, Malcolm Harper and Matthew Griffith spoke about the premise of their co-authored book, “Financial Promise for the Poor: How Groups Build Savings” wherein they discuss a phenomenon that has been overshadowed by the well-publicized microcredit side of the field, namely, that of savings groups.

In a savings group, women, and to a lesser extent men, begin their economic activity by first pooling their savings (pennies really); this is accumulated each week and each group member, in her turn, can take out a loan from the group fund. In Haiti and other parts of Africa and the Caribbean, one common type of savings group is called a ROSCA (rotating savings and credit association), with a more flexible version of this group called an ASCA (accumulated savings and credit association).

ROSCAs and ASCAs are two of many other types of savings groups, which are championed by such organizations as CARE, CRS, Oxfam America, Freedom from Hunger, the Aga Khan Foundation, and, of course, India’s government agency NABARD. (The SEEP Network Savings-led Financial Services Working Group has recently published a paper, “Savings Groups: What Are They?” that lays out the geography of savings groups.)

In India, the largest contributor to the Microcredit Summit Campaign’s data collection is a government agency, NABARD, which links savings groups to banks (last reported more than 38 million women living on less than US $1.25 a day with access to credit).

Additionally, the Bill & Melinda Gates Foundation has funded a 3-year multi-million dollar, multi-organization initiative to pilot three savings methodologies in Africa: Oxfam America’s “Savings for Change,” CARE USA’s “Village Savings & Loan Associations,” and Catholic Relief Services’ “Savings and Internal Lending Communities.”

What is the difference, then, between these types of savings groups and village banking schemes in microfinance? For Wilson, who has done considerable research in Haiti, savings groups are unique because unlike microcredit, they generally fund emergencies while microloans fund productive business activities. That way, if one group member has a medical emergency, she can take out a loan from her ROSCA to pay for her hospital bill.

According to Wilson, these savings groups are not old-fashioned and its members are not naive, rather these locally-occurring, locally-forming groups have arisen in response to the poverty they face and the uncertainty of their daily lives. Wilson contends that even when promoted by both local and international and NGOs, these savings groups are sustainable (“promotion” referring to different NGOs starting their own savings groups using a previously developed model).

Griffith spoke to the potential danger of these different “brands” of savings groups, faulting many for not adapting enough to the specific environment of each group but rather competing with other “brands.” Griffith, who studied pastoral communities in Ethiopia, highlighted the importance of pacing with regards to groups taking on greater financial capabilities than they can handle too quickly, overburdening groups and frustrating members.

These savings groups, which Wilson sees as a complement to microcredit, are to Harper rather an alternative to microcredit programs. Frankly, he said, people do not have unlimited time to attend meetings for both microcredit and savings groups. In contrast to serving as a time-consuming add-on to microcredit, savings groups provide an alternative that is more empowering than microcredit because it is owned and operated by its members, and is very similar to what people are already doing.

“Classic microfinance is just about putting people in debt,” said Harper, and in many cases, it is exploitative because it requires a continual involvement on the part of the microfinance institution and has massively expanded debt among the rural poor.

As with Harper, for Ingrid Munro, founder of the Kenyan microfinance institution Jamii Bora, saving is an integral first step in borrowing, because it teaches people how to manage money. Munro, who spoke at the 2010 Africa – Middle East Regional Microcredit Summit in Nairobi this past April, cited how many people must first take the important step of learning how to save:

“When you are a beggar you have learned that if you get some money from some nice tourist, then you buy food and you eat it with your kids right away; then nobody can steal it from you. So they were not used to saving, and we had to teach them how to save before they could borrow. [our emphasis] So we insisted you can borrow twice as much as you have saved, but you have to save first. And that has been a blessing actually for us; that has taught everybody how to handle it.”

This panel examined savings groups from many angles and in their multiple capacities, and through different points of view, discussed the usefulness of them as a complement or an alternative to microcredit programs. The latter argument criticizes microcredit programs for allowing clients to access money that they had not first saved. This is all well and good when group members diversify their economic activities, so the argument goes, so that if one member’s crops fail, she can take out a loan from her fellow members who raise chickens. However, what happens when there is a disaster that affects all group members at once?

The effects of the Haiti earthquake on ROSCA members will be a test case of the “complement or alternative” debate. Though women kept up their group meetings in the spirit of solidarity, Wilson was unsure whether all group members were in need of loans from the communal fund—and there not being sufficient for everyone. Perhaps in the presence of an external fund, women would be able to access a greater amount of capital in case of emergencies.

The experience of Fonkoze, Haiti’s largest microfinance institution, and FINCA Haiti demonstrates the positive role external aid when clients have died or have lost their homes or businesses. Only with the help of a grant from the Citi Foundation could FINCA Haiti write off one third of its loans and take on 1,000 new clients. Fonkoze wrote off 10,000 loans with donations from the Red Cross and other charities, and in fact expanded to more inclusive financial and nonfinancial services (see the New York Times article).

Cases like the Haiti earthquake highlight the need for financial services for poor people that include savings as a means of empowerment but the ability to access a greater amount of capital in times of emergency.