Savings Groups: Turning Banking on Its Head

Savings groups are a robust, simple, game-changing financial innovation that reaches the village poor by turning banking on its head. Instead of attempting to extend the reach of financial institutions that cannot profitably reach the poor, small groups of community members are trained to manage their own mini-financial institutions. Members save what they can weekly in a communal pot and loan their growing funds to members. Annually, timed for when money is scarcest, the pot is divided according to how much each member saved plus each member’s share of the interest. Every cent saved over the cycle plus interest is returned to the members. As a woman in Nepal I interviewed said, “Why pay them when we can pay ourselves?”

The simple model of savings groups is a marked difference from traditional financial institutions—banks, microfinance providers, large credit unions—with their imposing buildings, armies of staff, and complex systems, which rarely reach these rural areas. The principal reason why membership in savings groups has grown from one million to ten million in just six years is that instead of depending on institutions, savings groups tap into the vast, underutilized potential of smart people to solve their own problems.

Through the discipline of weekly saving, community members now have a useful sum of money in hand when cash is scarcest. With their end-of-year payout, they buy food during the “lean season,” before the harvest puts food on the table. They may pay school fees, purchase medicine, stock a business, grow more food, or buy a goat or two to fatten and sell. Benefits are not only financial; now that members have their own money to spend, women (most of the group members are women) have gained a measure of independence and benefit from the growing solidarity and mutual assistance among members.

Savings groups are as convenient as meeting under a tree in a village and as flexible as the rules members design for themselves. They are as reliable as their own accounting, which is quite dependable if registers are simple and training is adequate. They are easy for villagers to understand because they build on how women have saved for generations. “These savings groups are like a tontine [West African traditional rotating savings group], only better,” a woman in Senegal once told me. Instead of working like a traditional tontine, with each member in turn receiving her payout of the total collected that meeting, a member of a savings group can take out a loan when and in the amount she wants, as she saves the amount of money she can. Interest is charged on the loans, and fines are levied when members miss meetings or do not pay a loan on time, so when the fund is divided, members receive more money than they saved. More flexibility comes at a cost: the need for better record keeping. Better record keeping is the focus of savings group training and the major task of the local nongovernmental organization (NGO) staff who train these groups.

In the decades that I have been involved in promoting change, I have observed that savings groups are the best example of the power that local ownership and control can have. Savings groups overcome the risks of top-down efforts to improve the lives of the poor. What outsiders create often fails when they leave; what villagers create through their efforts persists, evolves, and grows. It follows, then, that our task as outside agents is not to provide services, but to catalyze the capacity of poor communities to resolve their own problems. After working to promote this type of approach to development for decades, I’ve identified nine principles needed for success:

• Start small to learn, but plan for scale—if there are thousands of communities, what will have been achieved if only a few are reached?

• Simple is better than complex.

• Build on what is already in place and already widely understood.

• Design for change that persists long after outside agents leave and that spreads from village to village without outside staff.

• Keep costs low: resources are scarce and the scale of poverty is vast.

• Give nothing away: if what is introduced depends on a free handout, it will not spread.

• Insist on local control: if local community members are in charge, new development initiatives will last.

• Establish high performance standards and insist on meeting them.

• Build learning and innovation into program design: it is impossible to get it right the first time.

These principles are described in greater detail in chapter 1.

By adhering to these principles, the number of savings groups could grow fivefold or even tenfold in a decade, from a hundred thousand villages to a million villages. Assuming that savings group membership grows from ten million today to fifty million by 2020, these groups will by then mobilize and largely distribute US$1.25 billion of their own money every year, of which $750 million will be profits from lending. This growth is impressive especially considering that the individuals who are mobilizing resources at this scale are among the poorest people in the world, whose annual income is often less than $500 a year. The poor are not too poor to save.

These lessons of savings group promotion can be applied across the development spectrum, including areas such as agriculture, health, enterprise development, business literacy, education, and advocacy, among others. This task is already underway with promising, scalable results, described in chapter 7.

A savings-based approach will become increasingly necessary as the poorest countries and poorest regions cope with increasing challenges of climate change, scarce and depleted land, and endemic conflict. Given the amount of development assistance that is misspent and the declining amount of aid to the poorest countries overall, the value of a simple, replicable, and sustainable approach can hardly be overestimated. “In their own hands” development works—it builds resilience, reduces chronic hunger, and increases assets. (The impact of membership in a savings group is described in chapter 6.) Although much more is needed—basic infrastructure, markets, government services, good governance, more equitable division of resources—savings groups are a reliably useful starting point.