A New Paradigm for Microfinance: Savings and Credit

The US economy is premised on the concept of savings. However, donors rarely focus on the fundamentals of savings in international development projects. Donors want to spend out grants, and measure and evaluate the results of that spending over a relatively short period of time. While this makes sense in terms of accountability, over the long term, the beneficiaries are not saving for the time when they will be on their own. Mark Green, the new administrator at USAID said recently, “I believe, philosophically, the purpose of foreign assistance is to end the need for its existence." To his point, if we really mean to end foreign assistance, we need to help beneficiaries plan for the long term once we are “out of business.”

To counteract the traditional, short-term approach, more and more international development groups are moving away from microfinancing in the Grameen tradition (small loans from banks with low interest rates) toward local savings and credit groups. In this model, participants pool their resources, and then lend to each other or invest in their communities. This method cuts out the middlemen, who often charge exorbitant interest rates.

Worldwide, several large international non-governmental organizations (INGOs) estimate that more than 10 million people are involved in such savings and credits programs. By taking control over their own finances, individuals can decide whether they want to invest in a small business or farm, invest in their children’s education, or address other needs. Many community savings groups use pooled funds to build water wells, schools, or clinics; they set their own priorities, and establish control over both the public goods they build and the capital and interest to develop them.

A savings and credit group in Nepal.

Often, community groups grow their capital so quickly that they need to form cooperatives to manage it. They then move to a higher level of credit and growth, developing accounting, marketing, public advocacy, and other business skills necessary to expand markets and output.

This approach to alleviating poverty may seem like common sense, but several aspects are at odds with prevailing development approaches. Here are six ways international non-governmental organizations (INGOs) can adjust their programs to better assist with savings and credit initiatives:

1. Allow participants to manage their own funds. Otherwise, the group will not be autonomous and sustain itself once the INGO leaves. Through training of the groups and a participatory process to identify leaders in the communities, the INGO can relinquish day-to-day management of the funds.

When our organization, World Neighbors, established a savings and credit program in Oecusse, Timor-Leste in 2009, we trained the participants in the basic process of meeting every week, managing the funds, and setting low interest rates to help the fund grow. An early participant, Simon Quelo, successfully lead the group for five years. Even though he had only a primary school education, the training enabled him to become an expert in credit issues. His example has led others to step up, acquire training and skills, and lead other groups in Timor-Leste.

2. Stay in the wings for more than a few years. The often-lengthy time involved in amassing significant capital also argues for long-term INGO involvement.

World Neighbors either helps strengthen pre-existing, community-based organizations or helps create them so that the work can carry on after we leave. For example, in Timor Leste, our organization has partnered with Binibi Faef Nome (BIFANO)—a community-based organization focused on building the capacities of young people—for eight years. Our work has included collaboration on a phase-out plan that will transfer leadership and oversight functions and responsibilities to BIFANO. By training the leaders in the community-based organization on how to develop and manage the savings and credit groups, and providing basic managerial and financial literacy courses, they can take over when the time is right.

3. Involve both men and women. An inclusive approach helps communities begin to challenge and shed the gender assumptions and discrimination that hinder women’s ability to work and make an income outside of the home.

The savings and credit groups we have helped implement in India are composed of and led primarily by women. In 2001, we formed a savings and credit group with a local partner in the village of Amauja in the State of Bihar. With her husband’s permission, Munni Devi joined, and used credit to significantly increase her family’s agricultural output and income. She participated in trainings, and went on to form her own group and implement village programs to address issues including health, sanitation, immunization, and domestic violence. She later ran for sarpanch, the elected head of the village council, and with the support of her savings and credit groups, her husband, and others, she is now a model for other women interested in political leadership.

4. Start small, and don’t rush it. Groups of no more than 30 or 35 are the most successful. The group members can support each other as the capital grows. If there is a member having a hard time repaying a loan, the group can support her. If the participants don’t have much money, they may take longer to amass capital, but they will own the process. Once the groups get much larger, the mechanism changes to a more-traditional, cooperative model where the size is limitless.

Chameli Devi is an “untouchable” in Bihar, India, who joined a savings and credit group started by World Neighbors. At her first meeting, everyone deposited 35 cents. It took many months before the group could make loans sufficient to start a business. Devi eventually took a loan to start a furniture business where she sells to nearby villages. By 2017, she was earning more than 50,000 rupees (about $6,500) in annual sales—an extraordinary amount for a member of her class in her village. Her success has demonstrated that anyone can “start small” and, with patience and dedication, save and borrow in ways that can dramatically improve living standards.

5. Don’t involve banks. Community-based savings and credit programs avoid high interest rates and onerous conditions placed on borrowers if they have trouble paying back a loan. In small communities, groups can set their own low interest rates and help when someone is unable to make a payment.

Small savings and credit groups have many advantages, but their size can limit the amount of credit they can extend. To scale up, World Neighbors helps groups come together to form savings and credit cooperatives. In Kenya, for example, the Akukuranut Development Trust (started by World Neighbors) has successfully evolved from a collection of small savings and credit groups to a sizeable cooperative. With a capital base of millions of dollars, it rivals many banks. Yet, with its roots in community-based groups, it still lends at low rates and avoids burdening borrowers who experience repayment challenges.

6. Help communities create “endowments” or savings that will endure. This ensures that there is money to invest back into the community for a long time to come.

We have seen many groups invest the capital they initially saved back into the community through institutions that live on long after we leave. And we are not alone. Other development organizations— large and small—are using the methodology with great success. Organizations like CARE, Oxfam, CRS, PLAN, and the Bill and Melinda Gates Foundation have also implemented the approach, but it is still considered a relatively new way to assist and is often coupled with more traditional microfinancing.

While savings and credit groups are no magic wand and really only work as part of a holistic approach that involves health, water, sanitation, improved agricultural techniques, education, and other services, economic wellbeing is not sustainable without them. There is enormous potential for INGOs to help communities help themselves by filling this gap in the development dynamic.

Read more stories by Kate Schecter.