Deep Outreach Financial Inclusion

Mass –Scale, Low Cost Saving and Borrowing for Those

Microfinance Cannot Profitably Reach

Jeffrey Ashe

Adjunct Associate Professor

Columbia University

Visiting Scholar Brandeis University

May 2013

Preface

Financial Institutions cannot make money on a $50 loan or in managing $.25 savings deposits. Yet, tiny loans and savings deposits are the financial services that most villagers, especially poor rural women, need: a safe convenient place to park their bits of spare change so it can grow to a useful sum and easy access to loans ranging from $5 to $100 to be used for all purposes including—sometimes—a business. It is too costly for microfinance Institutions (MFIs) to reach this population. This is not a criticism, just a reality.

Reaching villagers at appreciable scale, I believe, requires a fundamental shift from debt to savings and from building financial institutions to supporting freestanding savings and lending groups managed by member-leaders not in a few villages but in villages by the thousands. Savings Groups are elegantly designed to provide tiny loans and a safe place to store savings. They are as convenient as meeting under a tree in the village. They are as flexible as the rules they design for themselves. And they are as reliable as their own accounting—which is quite reliable if registers are simplified and training is adequate.[1] NGOs train groups to manage their own funds and then get out of the way and observe as villagers train new groups on their own. This is a much simpler and less expensive task than managing an external fund, which requires an institutional presence for as long as there are outstanding loans. Savings Groups provide financial services without financial institutions.

These groups are also profitable but with all the profits returning to the members, not financial intermediaries. At the end of the yearlong savings cycle, each member receives what she saved plus her share of the interest on loans to members over the year. For the poorest this lump sum payout after a year of weekly savings is often used to buy grain for the “hungry season” between planting and harvest. Those better off may invest in a petty trading business, buy a goat to fatten, pay school fees, purchase new clothes or pay for a marriage.

This paper explores how Savings Groups work; how they are different from institutional microfinance; looks in detail at a Savings Group initiative in Mali; and explores the impact of Savings Groups in poor villages. It also lays out a vision for how the number of Savings Group members could be increased from 7,000,000 to 50,000,000 by the end of 2020 at minimal cost while building on a methodology that is well developed and a structure of trained intermediaries that is already in place.


They Know How: My Introduction to Self-Managed Savings Groups

In the fall of 2000, nearly 20 years since I helped launch the first microfinance projects in Latin America (more on this later), I folded my 6’4” frame into the economy class seat for the Air India flight from London to New Delhi then to Katmandu. I was chasing a hunch that there had to be a better way to deliver financial services to villagers. Arriving in Nepal, my research partner Lisa Parrott of Freedom from Hunger and I met Marcia Odell, the mastermind behind Pact’s Women’s Empowerment Program (WEP). Marcia’s lecture earlier that year had drawn us to evaluate her project. WEP had organized more than 120,000 women into 6,500 groups in little more than a year. I was amazed. No MFI I had heard of or worked with had grown this quickly. And the loans— funded entirely through member savings? Women like these living on the edge of survival do not have the capacity to save—or do they? And even if they could save what could they with such small sums of money?

Leaving Katmandu in a torrential monsoon rainstorm our driver picked his way down the treacherous road to the steaming lowlands, the Terai that borders on India. We visited WEP groups during the day. At night Lisa and I and the WEP staff reviewed what we learned over buffalo milk tea, momos and dahl. These were the basics.[2] WEP was organizing women into several 20-person groups in each village. Each WEP group was a mini financial institution where the money loaned was the money they saved with the profits returned to the members, much like a credit union but on a small scale and operating informally under the regulatory radar. There were no loans from a financial institution and no matching funds granted to the groups to supplement what they saved on their own. They even purchased the kerosene they used for their evening literacy classes, the lock boxes where they stored their money between meetings and the forms they used to keep their records. Marcia was passionate about this: “Dependency is not empowering.” The outcome; instead of waiting for a handout or a matching grant or a loan from a financial institution they undertook the disciplined task of mobilizing and managing their own money.

WEP combined finance with literacy training and business development. The women leveraged what evolved into advocacy groups to launch campaigns against girl trafficking and abuse, alcoholism and child marriage aided by additional training on women’s rights provided by the Asia Foundation. During a meeting of over fifty group leaders brought together for the evaluation, one of them told me, “We are more courageous when we are organized.” I was impressed at their sense of purpose; in the recently formed groups we visited when members were asked to introduce themselves they could scarcely stammer out their names as they covered their faces with their hands in embarrassment. In groups a year or two old the women confidently answered our questions.

Some of the group leaders took it upon themselves to train new groups. One woman proudly showed me her dog-eared WEP manual. “I formed 21 groups using that manual,” she said, though most had not trained other groups or had only trained one or two. I asked, “Since many of you are already training groups, why not make a business out of it?” They exclaimed loudly; “No!” One continued, “We would not be trusted; our motivations would be suspect. We train groups because other women are asking for our help. How could we refuse them?” The sense of ownership, that the future of their group was “in their own hands” helps explain both the resilience and the spread of the WEP groups.

At the end of the meeting I learned that some of the women at the meeting had previously taken out loans from MFIs but were no longer doing so, “Why did you leave?” “Why pay the MFI if we can pay ourselves?” one answered. Many had just received dividends from their Savings Groups and they saw that saving first – even if it took a little longer to receive a loan or that the loan might be smaller than they wanted right away (a limitation of Savings Groups)—made them money and built their savings in the long run. But for most of the WEP members the difference between paying an MFI or to the group was hardly the issue. Few of the largely illiterate and mostly very poor members of the WEP groups had even thought of taking out an MFI loan - they had no assets for a guarantee or a business in which to invest. Yet, in their groups, they were saving and borrowing and many had started businesses.

WEP had an answer to my growing uncertainty about how microfinance could reach villagers in numbers that make a difference. This was effective financing for women in scattered villages where financial institutions are weak and money is scarce, but it was also something more—a member-managed, member-owned model that spread through the enthusiasm of its local leaders. How did it work? The answer was as simple as it was profound. WEP jettisoned the complicated and costly infrastructure that financial institutions use to deliver their services, all the technical bureaucracy of securing capital, managing the flow of funds, making loans, collecting on them and preventing fraud. The task of the WEP staff and the some 250 NGO partners with which WEP collaborated was exclusively to train groups how to manage their own internally generated group funds as they learned how to read, run a business, manage their groups and advocate for their rights.

The difference in approach between WEP that worked to train groups to operate on their own and a typical MFI represents an entirely different stance to financial inclusion. In Bangladesh I watched the staff of the microfinance and development NGO BRAC meticulously enter scores of transactions into a huge ledger book at the centers where their members met. These women’s groups had little role in record keeping even though they had been borrowing and saving with BRAC for years (much as my bank in Boston manages my accounts.) In contrast, the WEP trainers helped only if the group’s secretary was not sure where to note a savings deposit or a loan payment. They intervened less at each successive meeting to encourage the groups to keep the records themselves. As Lisa and I interviewed group after group in the sweltering Terai heat, each conversation shattered another of the microfinance myths I had heard (and had helped promulgate) for years: the poor can’t save, loans must be the starting point and be administered through institutions, and the staff must control where the program expands.

The WEP staff provided the “they know how” mindset based on the assumption that groups will quickly learn to manage themselves if asked the right questions.[3] They called it appreciative inquiry: What do you like best about your group? What would a better group look like? How could that be achieved? What will you do first to achieve this? When? Who is responsible? How will you know that what you worked for has been achieved?[4] Promoting Savings Groups is not about control. It’s letting go and marveling at the outcomes but not until the groups have been solidly trained.

My Role in the Introduction of Microfinance to Latin America

I know well what microfinance institutions can and cannot do. In 1982 I introduced solidarity group lending to Acción International; I was Acción’s Deputy Director at the time. The idea seems commonplace today but then it was novel: lending to groups guaranteed a high rate of repayment, even from those living along the twisting alleyways in the slums where debt collectors found it difficult to track down a defaulter. For any of the five in the solidarity group to receive a new loan all five had to be up to date on their payments. The groups vetted and tracked themselves.

Along with solidarity group lending, I introduced to Acción the up-to-then unheard of idea that it is possible for a credit provider to be sustainable and even profitable while lending to the poor. Given today’s obsession with making money, sometimes big money from microfinance it is hard to imagine a time when the idea of a sustainable financial institution had to be sold to the skeptical Acción staff. Solidarity groups had to take out loans that they paid interest on, yes, but they did so in a way that inspired solidarity and mutual aid. It also ensured mutual accountability through “peer group pressure” when a group member was not paying.

I “appropriated” the solidarity group methodology from FEDECREDITO, a bustling Salvadorian credit union who’s Grupos Solidarios who were borrowing with almost perfect loan repayment, despite the civil war.[5] To put FEDECREDITO’s success in context, in 1982 Acción’s largest project in Recife, Brazil had just four hundred borrowers. The FEDECREDITO staff had never heard of Grameen Bank.

Since I introduced these concepts to Acción thirty years ago, I have watched microfinance transition from a small group of impassioned visionaries who convincingly demonstrated that the poor would pay back their loans, into NGOs that covered their operational and financial costs through their microcredit operations. The first regulated MFI, Banco Sol in Bolivia, was established in the late 1980s and since then banks and even retail outlets and now telecoms have entered the fray. Those early NGOs blazed the trail for the commercial microfinance ventures that followed.


From Microfinance to Savings Groups

Some of the same and now graying visionaries – myself included – who launched microfinance (along with many from the younger generation), are now behind what we call the “Savings Group Revolution.” Even though microfinance worked well in cities and in the peri-urban shantytowns that surrounded them and in densely populated countries like Bangladesh, most of the rural poor had not been reached. What the poor needed was a “good enough” way to store money that made them money and to access very small consumption smoothing, emergency, and working capital loans. These are exactly the services that Savings Groups provide. As their needs increased they could access loans from financial institutions.

The principal successes of Savings Groups have been in villages, often remote villages, which the institutional approaches have failed to reach. Take Espinar, perched more than 4,000 meters in the Peruvian Andes. With a population of only 14,000 Espinar is served by eight MFIs. Yet of the women we interviewed herding their sheep and llamas a few kilometers from town, almost none had heard of MFIs, much less used them. The MFIs in Espinar were reaching the urban ‘entrepreneurial poor,’ but what about the sheepherders? The situation in Espinar is indicative of the mismatch between supply and demand. Worldwide only 2 in 10 of the working age population accesses improved financial services.[6] Savings Groups may be the most appropriate vehicles for reaching a majority of them.

Even where MFIs are present there is a need for Savings Groups. I recently visited a village in Cambodia where several Savings Groups were in operation despite seven MFIs in the village competing for customers. Both Savings Groups and MFIs were assuming their appropriate roles. Savings Groups were used for saving and small loans where the procedures for taking a loan are simple, flexible, and convenient and MFIs were used for larger rice production loans where their land is at risk if the loan is not repaid.