Forget microcredit: microsavings work much better
Update: Jeff Ashe responds in the comments section to some excellent comments from readers
Microcredit has been getting a bad press recently – criticised for eye-watering interest rates, high indebtedness levels, and excessive hype in terms of its development impact. Oxfam America reckons it has a much better alternative – helping poor people to save first and then borrow. Last week, I interviewed Jeff Ashe (right), who runs Oxfam America’s renowned Savings for Change initiative. Here are some key points:
What does SFC do? The methodology turns traditional microfinance inside out. Instead of creating vast institutions, SFC trains groups of women in how to run basic savings groups and then gets out of the way and lets them get on with it.
How do SFC groups differ from the traditional community rotating savings and credit associations (ROSCAs) in most parts of the developing world? ROSCAs typically consist of a group of women putting in the same amount every week, and taking it in turns to receive the pot. SFC is more complex –women elect their own officers, write their bylaws, keep records and meet weekly. The big difference from ROSCAS is that members can take out loans when they need them, choose the amount they want and then pay interest. Savings plus a share of the interest income is then distributed to members when they most need the cash, between the planting and the harvest. The return on savings in Mali runs at 30% or more every year.
How many women are involved? That’s the astonishing part. The scheme has gone viral and now reaches 560,000 women in 5 countries in Africa, Central America and Asia. Mali is the biggie, with 400,000 women involved in about 4,500 villages. According to Jeff, who has been working in microfinance since 1980, ‘this dwarfs anything I’ve worked in.’ A number of other NGOs are engaged on similar schemes, probably reaching about 5-6 million people in total, mostly in Africa but with increasing numbers in Latin America and Asia.
How much does it cost? Jeff puts the cost at about $20 per woman, compared to $200 of start-up costs per borrower for typical microfinance institutions, and $12,000 per household in a Millennium Village.
What’s the impact? SFC has been heavily evaluated, with a big randomised control trial currently under way in Mali (let’s hope that isn’t messed up by the current political upheaval there). Although the RCT result won’t be ready until early next year, other research shows:
– Income smoothing, e.g. over the course of the crop cycle, leading to improved food security
– Women acquire greater voice in household decision-making and (to a lesser extent) within the community
– The savings groups report that they value the increased solidarity and mutual support as much as the actual savings – this is an exercise in social capital accumulation, and likely to lead to wider benefits in terms of women’s organization.
What happens when the funding runs out? We’re about to find out. The Gates Foundation has been funding animators and local NGOs to deliver training packages, and that money is now coming to an end. According to Jeff, conventional donors and microfinance institutions don’t like the lack of institutions or technology (they keep urging SFC to be trendy and adopt mobile banking). So we will now see what happens when the savings groups are cut loose (Oxfam America will try and at least find enough money to keep monitoring impact).
Jeff has already seen what happens when the funding gets cut. He got the original idea for SFC when he stumbled across a USAID-funded scheme in Nepal run by an INGO called PACT. There too, the scheme had gone viral. ‘I was stunned – day by day all my preconceptions collapsed; microfinance shibboleths fell crashing to the ground. Poor people can save; they will repay their loans, external loans are not needed, the savings groups will start a movement.’
Bizarrely, USAID decided to cut PACT’s funding and invest the money in hydro projects instead, so the savings groups were abandoned. When a researcher went back eight years later, she found that two thirds of the original groups had survived, and new groups had formed, bringing the numbers back to those at the time the project had ended. The average number of women had risen from 22 to 26, and the average loan fund had quadrupled in size.
Which in terms of the evolutionary model discussed previously on this blog, suggests that these schemes are a fit variant that is likely to survive and replicate. Jeff is confident – ‘I want to watch where it goes, how it develops’ (see previous post on the positive deviance emerging in the scheme).
Too good to be true? I ask him what the main criticisms of the scheme are and he lists a few:
- It’s not adding much, merely repeating the ROSCA system (see above on that one)
- The amounts saved, an order of magnitude smaller than microcredit loans, are too small to make a difference (according to the evaluations, not true, especially for income smoothing, but hopefully the RCT will nail that one)
- It’s not really financial inclusion because no new institution is being created (that sounds a bit silly)
But he is a man with a mission, and probably not the best source to criticise his baby – any other doubts/concerns?
Last word to Jeff: ‘In 1980, I helped establish the framework for conventional microfinance, working in Latin America for Acción. That evolved into regulated financial institutions, including Compartamos. I would love to just out-compete them on savings groups – I love that kind of stuff!’