While microcredit was the linchpin of microfinance for some four decades, in the past 10 years savings by the poor has taken a foothold in the sector. The savings movement caught on in the microfinance community following research showing that the poor DO save. More importantly, savings groups have been shown to form a key tool in helping poor households manage their financial lives.

The article below, contributed by Jeffrey Ashe, co-author of In their Own Hands: How Savings Groups Are Revolutionizing Development, outlines how group savings support development. For the past fourteen years he has worked with savings programs throughout the world.

Two and a half billion people worldwide, most of them living on less than one dollar a day, need a better way to save and borrow. As cash runs low they do without, sell their few possessions, borrow from relatives, or take out loans usurious interest rates. Savings groups provide an alternative, safe and convenient place to save and easy access to small loans to pay school fees, purchase medicine, stock a business, or buy a goat to fatten or buy food before the harvest. Members save what they can in a communal pot and loan their growing fund to each other for their short term needs. Annually, timed for when money is scarcest, they divide the pot according to how much each saved plus their share of the interest on loans. As they manage their groups they gain independence, skills and aspirations. The alternatives?

  • Donations and charities: Charities and donations may help in the short term but charity does not build self-sufficiency, discipline and mutual accountability. When the money runs out those who were fed today will be hungry tomorrow
  • Microfinance: Even the most innovative micro lender cannot make money on $0.50 savings deposits and $50 loans delivered to thousands of remote villages.
  • Conditional Cash Transfers: Many counties provide monthly cash grants for the poor, 35 million in Latin America alone. The money is usually used well, but the cost is high. The poorest countries lack the necessary resources or infrastructure or the political will to make these payments.

Savings groups are an approach to mitigating poverty that is uniquely scalable because it is based on catalyzing the capacity of people to mobilize their own resources with only transitory outside help. The cost: a dollar per person, $1,000 for a village of 1,000 inhabitants and trending downward as what is learned about savings groups in one village spreads virally to neighboring villages. Within ten years, savings groups with 100 million members could improve the lot of the poor in a million villages, at a cost of less than one percent of what these countries will receive in foreign aid. The systems and the institutional capacity are in place.

Savings groups are neither new financial services nor regional. They are considered a low-risk form of microfinance, based on members’ savings and referred to as village savings or savings associations. One of the oldest informal financial systems in Africa is “susu” where collectors (for a small fee) looks after an individual’s susu account, providing a secure way to save and providing ready access to individual’s money. Susu collectors are often recognized by distinctive coat with many pockets. There are many other types of savings programs, including the following modalities:

ROSCAS (Rotating Savings and Credit Associations) are doubtlessly the most prevalent management tool in the world created by villagers as well as city dwellers through the word of mouth spread of good ideas. Every country or region has its own name – susus in Ghana, tontines in Francophone Africa, Sans in the Dominican Republic and Dhukutis in Nepal. In essence, a group of peers who know each other come together, decide on the amount each member will contribute each period – often each month with each person in turn receiving the total amount collected at the meeting in turn. The ROSCA disbands when all have received their payout.

ASCAS (Accumulating Savings and Credit Associations) are like savings groups organized by villagers without outside training or support. In an ASCA instead of each member receiving their payout in turn until the end of the cycle, money is pooled in a common fund and lent out to members as needed. The fund is distributed to each member at the end of an agreed cycle. ASCAS are not nearly as prevalent as savings groups and lack the transparency and discipline of savings groups with their lock boxes, bylaws, elected officers and discipline.

SACCOs (Savings and Credit Cooperatives) are prevalent in East Africa. Since they are larger than savings groups and transactions are not observed by all the members at each meeting, although many SACCOs are well run, many suffer from poor management and elite capture. The conclusion – small groups with a high degree of transparency function better than larger cooperatives, MFIs and banks that are well regulated. Groups of an intermediate size often do not work well without intensive training and oversight.

The extraordinary growth, success and durability of savings groups are due to following these principles:

  • Start with a vision of scale and design for viral replication – multiple groups in thousands of villages in a single country
  • Less is more, and the simpler the better
  • Build on what is already in place
  • Be sustainable – 89% of groups worldwide are saving and lending without outside support
  • No giveaways – giveaways keep control in our hands, not theirs
  • Keep costs low – the problems of poverty are vast
  • Insist on local control, the key to building skills and lowering costs.
  • Embrace learning and innovation

Are savings groups the silver bullet for eradicating poverty? No development effort can deliver on that promise – but savings groups are perhaps the best and most practical place to begin. The strategy of savings groups is based on an awareness that good ideas spread as they always have: through talking with neighbors and helping one another. We will judge ourselves successful when development passes from our hands to theirs.

[Editor’s note: A related article in the New York Times blog further expounds the benefits of savings groups.]