A Dialogue on Member-Owned Financial Institutions and Increasing Access to Savings Facilities
Jeffrey Ashe (Oxfam America) & Elisabeth Rhyne (Acción International)
The cost of reaching the rural poor with microfinance can be prohibitive for MFIs, credit unions, and banks. But MOFIs - small, savings-led, often informal Member-Owned Financial Institutions - have shown promise in reaching clients living in areas with poor infrastructure, low population density, and low levels of economic activity, especially in Africa and Asia. MOFIs include various forms of informal self-help groups, ROSCAs (rotating savings and credit associations), and small savings and credit cooperatives.
To examine the potential role of MOFIs in mobilizing savings and scaling up rural access to finance, CGAP asked two leading practitioners - Jeffrey Ashe of Oxfam America and Elisabeth Rhyne of Acción International - to comment on the issues.
The Case for MOFIs: Jeffrey Ashe
For the entrepreneurial poor and people in densely populated areas, a good part of the unmet demand for financial services can be met by simply extending the outreach of microfinance institutions, banks and credit unions. Technological advances and two decades of on-the-ground experience show that this market can be reached efficiently and even profitably, at least by the top tier of formal financial institutions.
An entirely different approach is called for to reach the much larger number of people whose savings and borrowing capacity is in the order of tens rather than hundreds of dollars, who often need a safe place to save rather than take on debt, and who live far from towns and cities. The key is training many thousands of small groups to deliver basic savings and lending services by building on institutions villagers already understand - their tontines, susus, chit funds, money-go-rounds and tandas.
These "modernized ROSCAs" add lending at interest and simple record keeping to traditional systems, with interest from loans building the group fund. Since savings are pooled rather than given to members in turn, several group members can take out a loan at the same time. Adjusting savings to the highly variable cash flow in villages adds flexibility to the model. Charging an interest rate of between two and ten percent per month quickly builds the group's fund with the trust that ensures compliance in their ROSCAs ensuring a high level of accountability. After all, it is their own money that they are managing.
"Savings- led" programs rely on the capacity of groups to manage their own accounts. Groups typically receive three months of weekly training through local NGOs, and then progressively less-frequent monitoring until they can operate on their own. Graduating trained groups quickly, and encouraging "spontaneous replication" where group leaders train new groups, are the keys to this highly decentralized model.
Groups are trained through local NGOs carrying out a range of projects in poor rural villages, rather than specialized microfinance institutions (MFIs). Since there is no external loan fund to administer, the NGO "animators" focus their entire effort on training groups and education. The limited scope of the intervention keeps costs low.
While mainstream microfinance defines sustainability as covering operational and financial costs, this savings-led model defines sustainability as MOFIs being able to operate successfully on their own. Minimizing the training and support costs per group is an important measuring rod. Periodic monitoring and training after graduation insures portfolio quality.
Notwithstanding their promise, there are several challenges:
- Maintaining group quality: Group quality suffers if the "animators" are not well trained and supervised.
- Graduating quality groups quickly to keep costs in check. Animators tend to visit groups long after they can operate on their own unless there is a clear time-limited training protocol and good supervision.
- Introducing simple record keeping to guarantee transparency: These programs bog down if the record keeping system is complicated and animators keep the records rather than teaching the groups to keep records themselves.
- Ensuring equal access to loans for all members. Unless there is good training and monitoring, the better-off within a MOFI tend to monopolize the group fund.
- Avoiding the takeover of the groups by local elites. Once again good training is required to stand up to local leaders who ask for a loan only to never to pay it back.
Showing how quickly these programs can reach scale, Oxfam America and Freedom from Hunger trained twenty-one "animators" from two Malian NGOs in February 2005 as they launched Oxfam's "Saving for Change" (SfC) initiative. Within six weeks the animators had organized 216 all-women groups and by December the group leaders had trained an additional 106 groups on their own initiative. At last count 74 percent of group members had received loans. None of the groups had failed and late payment was an acceptable 1.8 percent. The women were also trained in malaria prevention and treatment.
Other examples display the impressive potential for MOFIs to achieve scale. In just three years Pact's Women's Empowerment Program (WEP) in Nepal trained 6,500 groups using 225 local organizations for village-level organizing and follow-up. The net number of groups increased after Pact's financial and technical support was withdrawn, as group leaders continued to train more groups than the small percentage that disbanded.
In Africa, local CARE staff in 18 countries trained "Village Saving and Lending" groups with 437,000 women members, with the largest programs achieving most of their growth in five years. In India, the partners of Catholic Relief Service partners have trained groups with more than 785,000 members, adding disaster preparedness, micro watershed management and literacy to the basic saving and lending package. Most of the growth occurred over a four year period.
In India, at least three million self-help groups have been trained by thousands of NGOs and government programs since the late 1980s, and are providing basic savings and lending services. One point four million of these groups topped off their internally managed savings with bank loans facilitated by the National Bank for Agriculture and Rural Development (NABARD). By acting as a facilitator of a vast decentralized network of NGOs and rural banks, NABARD has become the largest and fastest growing microfinance initiative in the world.
Among US based institutions, CARE, Catholic Relief Services, Pact, and Oxfam America have embraced the "savings-led" approach and have launched locally-adapted versions of the model in many new countries. They recognize that while their local partners are unlikely to become the next Grameen Bank, ASA, or Banco Sol, they can become the trailblazers for a highly effective approach to microfinance that builds on what they are good at - grassroots organizing and training. An important part of the hardest to reach market for savings and lending services can be served through MOFIs using a savings led model.
The Response: Elisabeth Rhyne
Jeff Ashe's savings and credit group approach to reaching very poor and remote populations with financial services works in a variety of regions and yields some impressive client outreach numbers. The savings and credit group model is a simple yet important improvement upon informal ROSCAs and ASCAs, giving them more capacity and staying power. It's one of the best tools known for getting financial services to the most difficult populations. Fortunately, it's been gaining ground in recent years as more organizations learn the techniques of developing the savings and credit groups.
While I heartily endorse the rapid spread of these programs, I can't suggest that they are a full answer to the challenge of mobilizing savings and scaling up rural access to finance. They have a place, but are not a substitute for continued efforts to reach harder groups with better services.
Consider the question of quality. Quality financial services have the following characteristics:
- Convenience and low transactions costs
- Ready availability over time
- Fit to client's need
- Reasonable price and return
- Security
Let's look at quality from the vantage point of a member of a savings and credit group in a remote area. Her group offers convenience, since transactions take place right in her village, but other transactions costs are very high: she has to spend a lot of time in group meetings discussing things. She may like to spend time in a structured group with her neighbors, but she may feel that her time and energy are needed for more pressing tasks. If she wants a loan, she can try to get it from her group, like some members of her group have already done. But if she is one of the less powerful members, she may not succeed.
Studies of savings and credit groups rarely examine the actual lending patterns of the groups, and so we know little about whether most or only a few people can access loans and whether they can reliably do so when they need the money. We can guess, however, that our client will have to convince the members of her group and contend with other members of her group for her place in the queue. The amount she can borrow, her ability to access her savings, and the timing of her transactions all have to be mediated by the group, and there are likely to be periods of time when access is restricted because of the claims of other members. If her group falls apart or goes through a period of dormancy, there's no chance for a loan.
Our saver is likely to be happy with the interest rate on her loan and the return on her savings, since she has no alternatives. As Jeff points out, she knows that the interest income on the loans benefits the group as a whole and may give her a good return, especially since the group does not have to pay any administrative costs. However, if one of her group members defaults, her return on savings may drop to zero or below.
And this is one of the chief gaps in service quality: savings and credit groups offer limited security. In a pathbreaking study, MicroSave examined the frequency with which people lose their savings in the formal and informal sectors. The study showed that the rate of loss of savings is extremely high in the informal sector and drops as the level of formality increases. Despite the sensational publicity surrounding examples of bank failure, an ordinary person has a many times greater chance of losing her savings in a savings and credit group than in a bank.
To summarize, credit and savings groups score well on convenience and can, if all goes well, also offer fit-to-need and good price and return. However, things often don't go well, and in that case there are problems of high transaction cost, constraints on availability, and worst of all, lack of security.
If we seek to improve upon the quality offered by savings and credit groups, what is next? I'd propose two broad tracks. The first is to help the savings and credit groups grow up to be - or to help launch - more permanent and stable financial service providers. The two key elements in this process are external supervision (even if relatively simple) and connection to a larger institution that can increase the continuity of services and spread risks. The Self-Help Group Bank Linkage Program of NABARD in India, which Jeff refers to above, is one such example. Many of the NGOs connected to the SHG movement also assist savings and credit groups to form federations that provide self-regulation. Some federations function well; others don't. Another path in the same direction is to promote the deeper penetration of credit unions that operate under a somewhat more formal set of regulations and are linked to other financial institutions, at least in the increasing number of countries with healthy credit union movements. These paths seek to combine the best of member ownership with the best of formal systems.
The second track is for larger formal institutions to continue pushing farther into more difficult areas, through the creative use of alternative delivery channels (like non-financial retailers) and technologies (though we are still awaiting true breakthroughs here). Such efforts are gathering momentum. Examples include the upgrading of post office savings banks across Africa, experimentation with rural outreach by urban MFIs like Mibanco in Peru, and rural banks in the Philippines adopting cell phone banking (as cell phones themselves penetrate deeper). Efforts like these are poised to reduce the number of people who can only be served by the savings and credit group approach dramatically during the next decade.
So, savings and credit groups offer a minimum level of financial services, provided in a low cost, physically accessible manner, but with major shortcomings. Do they pass a cost-benefit test and can I endorse them? Absolutely. But are they enough? Not by a long shot.