A Savings-Led Alternative to Financial Institution Building

The cost of reaching the rural poor with microfinance can be prohibitive for microfinance institutions (MFIs), credit unions, and banks. But small, savings-led, often informal Member-Owned Financial Institutions (MFIs) 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.

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 reach 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 by well-managed financial institutions.

An entirely different approach is called for to reach the much larger number of people whose savings and borrowing capacity is on 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 to train many thousands of small groups to deliver basic savings and lending services by building on what villagers already understand—their tontines, susus, chit funds, money-go-rounds, and tandas.

These “modernized ROSCAs” (revolving savings and credit associations) 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; clients see this as a major advantage. Adjusting savings to the highly variable cash flow in villages adds flexibility to the model, and charging an interest rate of between 2 and 10 percent per month quickly builds the group’s fund along with the trust that ensures compliance in their ROSCA and creates demand for a high level of accountability. After all, it is their own money that they are managing. Villagers quickly grasp the idea that it is better to pay interest to themselves and reap the benefits than to pay an external credit provider, be it a money lender, a bank, or an MFI.

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