MICROFINANCE PAPER WRAP-UP: Savings Groups: What Are They? By Hugh Allen and David Panetta, Published by The SEEP Network

By Hugh Allen and David Panetta, Published by The SEEP Network, June 2010, 64 pages, available at: http://seepnetwork.org/PDFfiles/Savings_FINAL_web.pdf

Even as microlenders become a popular channel through which to reach the poor, many of those in rural areas and urban slums remain without access to formal financial services. Some reasons for this are the perception of high costs to reach them in remote areas, borrowers’ restricted debt capacity due to dependence on seasonal production and an increasing interest in savings instead of credit. As a result, informal savings groups continue to grow in popularity.

Members of a savings group save together, lend their savings to each other with interest and share the profits. In many cases in rural areas, savings groups have emerged as part of formal banking programs. The authors argue that savings groups have the capacity to improve gender relations among communities by empowering women, foster local democratic governance through the promotion of transparency and create a sense of autonomy among group members. If enough savings are available, they also have the capacity to make small loans that can supplant unsavory debt collectors.

The authors take a close look at a savings group project carried out in the 1990’s in rural Maradi, Niger, by CARE Niger, an affiliate of Switzerland-based NGO CARE International. The training system used there emphasized management committee elections and that people would get their savings and interest earned at the end of a set term. CARE Niger found that a “time-bound” approach, where group members get their money and interest after a predetermined length of time (known as a cycle), helped the savings group become independent after about a year of supervision. Cycles are aften times provide cash when it is likelt to be most needed, such as in between harvests. As of 2010, an estimated 197,000 women in Niger belong to savings groups.

Today, “facilitating agencies” send field officers to mobilize, train and supervise many types of savings groups. Some groups use ledgers or passbooks to track member savings, while others use memorization; some groups allow members to save different amounts; and some allow members to withdraw their funds on demand. As rules continue to be modified, there are general characteristics that have remained the same: groups range from 5-30 members (with an average of 22); members decide who joins the group; only management members handle money, which is kept in a lockbox; groups develop their own rules; savings are used to capitalize a loan fund from which members can borrow; and records of each member’s savings are kept and routinely updated.

The authors note that savings groups have compensated for the lack of formal credit services in areas that microfinance institutions (MFIs) cannot reach. Savings groups meet small credit needs (with loans ranging between USD 5 and USD 500) without the “intimidation” of a debt collector, but with a high level of accountability, since all transactions are carried out in front of group members during meetings. Loans are typically used for emergencies such as funerals or medical needs and have an interest rate between 35 percent and 50 percent per year.

While many formal banks are reluctant to offer their products to savings groups, the authors note that many MFIs are exploring ways that they could serve as a link between savings groups and sources of external capital after the savings group has developed a successful track record. External capital might take the form of small investments from the MFI in the group’s loan fund and/or as insurance products offered to individual members. The authors note that MFIs need to be careful about over-indebtedness when lending to groups, just as they should be when lending to individuals.

The authors conclude that savings group frameworks are constantly changing and that new products and new rules continue to be put through trial periods that will determine what these groups will look like in the future.

About SEEP Network: The Small Enterprise Education and Promotion (SEEP) Network, founded in 1985, connects microenterprise practitioners from around the world to develop practical guidance and tools, build capacity, and help set standards to advance its mission of sustainable income in every household. Its members are active in 180 countries.

About CARE International: CARE International (CARE) is a Switzerland-based non-governmental organization with global poverty reduction programs aimed at developing women’s economic capabilities. Founded in 1945 and originally established as a means to send supplies to post-war Europe from America, it has evolved into a large-scale humanitarian organization. As of June 30, 2009, CARE supported 800 poverty-fighting projects in 72 countries to reach 59 million people. It reported total assets of USD 952 million at that time.

By Diana Baide, Research Assistant

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