This commentary by Joanna Ledgerwood, Senior Advisor on Access to Finance for the Aga Khan Development Network, is adapted from a discussion during a visit to the Aga Khan Foundation USA’s Washington, DC office. Her new book, The New Microfinance Handbook, will be published in early January 2013 by the World Bank.
For the most part, microfinance institutions (MFIs) find it difficult to reach the very poor, particularly in remote rural areas. In countries where the Aga Khan Development Network works, somewhere between 60 and 80 percent of the population lacks access to financial services. In all of our work including market development, health and education, we realized that one of the biggest constraints is a lack of access to financial services.

To address this, we have been working with banks and MFIs to provide financial services in the areas where we work. And for those populations that are simply not viable for formal institutions to reach, we work with the community to provide services directly, building on the many informal financial service providers that exist: moneylenders, deposit collectors, friends and family. Almost all countries also have ROSCAs (Rotating Savings and Credit Associations)—groups of people that come together on a weekly, biweekly or monthly basis, where every member puts in the same amount of money, say $5 for example, and one member takes the money; at the next meeting another member takes the money. This continues until every member has had their turn. After it has rotated through everybody in the group, the cycle ends and the group can begin again, either with the same members or different members. Building on this tradition is a slightly more refined version called ASCAs (Accumulating Savings and Credit Associations). However, instead of rotating, the money collected each week or month accumulates and members can then borrow from the pooled savings. All these informal systems are for the most part, relatively convenient for the poor, but they are not always reliable (moneylenders are not always available when you need them), accessible (your turn in the ROSCA may not come when you need it), or secure (deposit collectors disappear; ASCAs can collapse).

As a facilitating organization interested in increasing access to financial services, the Aga Khan Foundation looked at the various providers and asked, “How can we improve both access to and usage of financial services to increase quality of life for the poor? How can we address weaknesses of local providers in the informal financial sector and the lack of outreach of the formal sector?” The answer wasSavings Groups. Savings Groups are similar to ASCAs but they are time-bound: The savings accumulate and are then lent out and repaid throughout the cycle. Savings are represented by “shares” that are purchased at each meeting. The group determines the value of each share and each member can purchase up to five shares per meeting. Each member has a passbook that records the number of shares with a stamp—no bookkeeping is required. Members can borrow up to three times the amount of their savings (shares bought); the group decides how much interest to charge. At the end of one year the accumulated savings and earnings from loan interest and fees is split amongst all the members based on their proportionate amount of savings. Groups can start again for another cycle. That provides a time for new members to join or old members to leave.

Because there is no bookkeeping, Savings Groups work well in the communities where we work, which often have low literacy and numeracy rates. Also, because the group savings are given back once a year, operations are very simple and transparent.

AKF trains the groups and then we exit (after about nine months), leaving behind sustainable financial service providers based right in the community. We also train agents to continue training new groups, paid for by the groups themselves, and to be available to existing groups to provide any required assistance. This way, even when donor funding ends, the groups continue to operate and new groups continue to be formed. We currently work in seven countries and have programs designed for another four countries, which we will begin once we secure funding.

In the last five years there have been significant improvements in the methodology. We are now at a stage where everything is so well developed that we can easily reach scale using local agents.

In Pakistan, Aga Khan Foundation helps women establish savings groups for financing emergency healthcare.

We also see these groups being used for other development activities. My personal feeling is Savings Groups are really about financial services and social capital.

However, in order to make sure the groups are not going to be overburdened and lose their independence (which we work so hard to foster), we studied how Savings Groups work when combined with other activities. AKF conducted 11 case studies of organizations in Asia and Africa and synthesized the findings in a paper, “Beyond Financial Services,” to put forth “good practice” guidelines.

Basically, it’s about what clients need. For the poorest clients, asset transfers (from the state) are likely what is needed—but they also need a place to save. For very poor people, Savings Groups work well. Now is the time for really big changes in terms of microfinance and financial services for the poor. I don’t think credit necessarily alleviates poverty, but I do think that access to financial services that are suitable and meet the needs of poor consumers can greatly increase quality of life. For example in Tanzania where we work, there is normally a hungry season lasting two or three months each year; many of our beneficiaries end up pre-selling their harvest in order to buy food. What happens is a trader goes door to door and says, “I’ll give you 50 or 60 cents on the dollar for your harvest now and when harvest time comes you give it all to me.” This means after the harvest, farmers end up with no income and the vicious cycle of poverty continues. If these farmers were able to save some money to get them through the hungry season and allow them to sell their harvest at full value (or better yet, store it until prices increase), they would increase their income, in effect, by 50 or 60 percent. So without giving them a loan—but by offering the ability to save—you can increase incomes.

It’s important to recognize that the poor—just like you and I – perhaps even more so simply because they are poor– need financial services that help them manage cash flows, build assets, make investments, and ultimately manage risks. And credit is not always going to be the right service.