1

Savings-Led Microfinance: An Introduction for LACRO

(Members of a community-based savings and internal lending group in Haiti share their experiences with CRS visitors. Photo: Kim Wilson.)

January 2008

2

TABLE OF CONTENTS List of Abbreviations 1 About this Document 2 Introduction to Savings-Led Microfinance 3 Principles: What it is all about 6 Practices: How it works (when it works well) 11 Potential: What it can achieve 16 Additional Resources 22

1

LIST OF ABBREVIATIONS ASCA Accumulating Savings and Credit Associations CGAP Consultative Group to Assist the Poor CIAT Center for International Tropical Agriculture CMLF Community-Managed Loan Funds DRD Deputy Regional Director EARO East Africa Regional Office IHD Integral Human Development LACRO Latin America and Caribbean Regional Office MFI Microfinance institution NABARD National Bank for Agriculture and Rural Development NRM Natural Resource Management PQ Program Quality ROSCA Rotating Savings and Credit Associations RII Rural Innovation Institute RTA Regional Technical Advisor SHG Self-Help Group SILC Savings and Internal Lending Communities VSLA Village Savings and Loan Association WEP Women’s Empowerment Program

2

ABOUT THIS DOCUMENT This document was developed by the Latin America and Caribbean Regional Office (LACRO) in response to repeated inquiries from Catholic Relief Services (CRS) field staff regarding savings-led approaches to microfinance: What is savings-led microfinance? How does it work? What benefits does it offer our Country Program? How can we incorporate it into our programming? What resources are available to support us? It is not intended to be an operational field guide, or even a comprehensive review of relevant literature, but rather a summary introduction to key concepts, opportunities and challenges in savings-led microfinance. It identifies the principles and practices common to most savings-led models, and describes the development potential and programmatic implications of this approach. The field guides included here as additional resources contain specific guidance for implementing community-based financial services for poor people. This document draws on three categories of resources: (1.) agency documents developed by CRS staff for field use, (2.) documents that were developed by former CRS staff and/or describe CRS-supported programming, and (3.) relevant primary and secondary literature drawn from other professional and academic sources. The document closes with a list of resources for further reference, including field guides developed by CRS and other agencies, which are included here as annexes. We wish to acknowledge the contributions of Kim Wilson, former CRS Deputy Regional Director (DRD) for Program Quality (PQ) in South Asia and currently of Tufts University, Guy Vanmeenan, current Senior Technical Advisor for Microfinance based in the East Asia Regional Office (EARO), and Matt MacGregor, former consultant with CRS/LACRO. This document draws heavily on their previous work in this area. Moving forward, senior microfinance technical staff in Baltimore and other overseas Regional Offices are currently working to develop a comprehensive savings-led curriculum (scheduled for completion in mid-2008) that will be housed, along with a growing collection of savings-led microfinance resources, in the LACRO Livelihoods Learning Center, a web-based resource center scheduled for inauguration in 2008. Furthermore, microfinance staff in Baltimore and EARO are collaborating closely with the LACRO DRD/PQ to organize a regional savings-led microfinance workshop for LACRO in March 2008 (details forthcoming). Meantime, we hope that this document and the resources recommended for further review will answer some of your questions and address the concerns that have been raised within the region regarding this approach. Please direct questions/feedback to Michael Sheridan, RTA/Sustainable Livelihoods, at msheridan@crs.org.gt.

Latin America and Caribbean Regional Office Guatemala January 2008

3

INTRODUCTION TO SAVINGS-LED MICROFINANCE As its name suggests, savings-led microfinance is organized around savings activities. It is an approach to financial services for people who are too remote or too poor to access formal services and marks a sharp departure from current microfinance, whose primary—and indeed, often exclusive—activity is credit or loan-based. Most savings-led approaches to microfinance are community-based, driven by the innovation and leadership of very poor people who are underserved by formal financial institutions. In countless villages around the world, millions of people gather to save, lend, strengthen the ties that bind them together, and address issues of community concern. Although the groups they form are called by different names—osusus in Tanzania, iqqubs in Ethiopia, mutuelles in Haiti, self-help groups (SHGs) in India, tandas in Mexico, tontines in Cameroon, xitiques in Mozambique—they share some common practices and their members share a common belief that the sustainable development of their communities can be catalyzed by resources found in the communities themselves. Some of these community-managed efforts, which evolved spontaneously on the basis of local intuition and in response to the shared need for (unmet) financial services, have been in operation for centuries. The longevity of these practices, and the fact that they share so much in common even though they evolved in isolation under very different circumstances, are good indications that their core practices are worth replicating. So how does it work? While there is some variation from one model to the next, the basic elements of the approach are the same.

• People from the same community who know one another well organize themselves into small groups (ideally between 10-30 members) for the purposes of saving and lending money. Trained facilitators sometimes coordinate this process. In some cases, community members organize themselves on their own initiative.

• Members of the group establish ground rules: who can belong to the group, when it meets and where, how much members will save, how much members can borrow and for what purposes, how and when members will repay their loans and at what interest rate, how the group will handle late payments or defaults, whether and how much members will donate to an emergency fund, etc.

• Group members elect their own officers. Group facilitation, treasury, record-keeping and accounting are the key functions that groups assign to specific individuals through this process.

• Members save small amounts of money regularly, which they deposit in a cashbox that is kept under lock and key by the group’s treasurer. Another officer will often have a copy of the key to the cashbox as a control and to reduce the temptation for theft.

• Once the group has saved enough money, it begins to make loans to members. • The loans are repaid with interest, expanding the group’s financial assets. • Most groups at some point complement their “private” focus on member savings and internal lending with “public” activities that address some of the challenges that limit their development.

4

• Existing groups expand participation in the model by helping other groups get up and running.

The record of these experiences is inspiring. Despite widespread skepticism about the ability of very poor people to save money and manage loan funds effectively in their communities, they are doing so on a massive scale. In Nepal, 130,000 poor women generated over $1.1 million in savings and interest earnings in less than two years in connection with the PACT-supported Women’s Empowerment Program (WEP). In Niger, 200,000 women participating in the CARE-backed Mata Masu Dubara (Women on the Move) have saved an estimated $3 million over the course of a ten-year period. And in India, over two million community-managed SHGs provide essential financial services to more than 33 million people. Beyond the cost-effective provision of sorely needed financial services, self-managed savings and internal lending groups around the world have also become catalysts of economic and social development. For these groups, turning their prodigious energies outward beyond their members does not reflect a sudden burst of charitable impulse, but the natural evolution of their work and a strategic effort to address the issues that limit their development. At the community level, they have provided social infrastructure and services where the state has failed to do so. At the national level, they have mounted effective campaigns to change policies and practices that perpetuate poverty or the exclusion of a particular group. While much of the magic of savings and internal lending groups is their autonomous, community-led character, there is an important role for agencies like CRS to play as facilitators of savings and internal lending activities in the communities where we work. CRS has extensive experience outside of LACRO promoting two particular models of savings-led microfinance: SHGs in India and Savings and Internal Lending Communities (SILCs) in various countries in Africa. The annexes to this document include comprehensive resources on these models, each developed within a specific context. The SHG movement has been a distinctly Indian experience, built on local custom, responsive to local needs, and synergistic with national development policy. The SILC methodology, meanwhile, is a variation of the Rotating Savings and Credit Association (ROSCA) model that has been used effectively in many countries in multiple regions of the world. The CRS SILC model includes some important improvements on the ROSCA approach that give it unique potential for adaptability across regions, but it has not yet been adopted by CRS programs in its current form outside the African context.1 The hope is that CRS Country Programs in Latin America and the Caribbean will be able to learn from agency practices in other regions to more systematically promote savings-led microfinance in LACRO. It may be that the SILC or SHG models can be adopted wholesale in LACRO. Perhaps one of these models will be modified slightly

1 It may be worth mentioning here that “savings-led microfinance” and “savings and internal lending communities” are generic terms that describes the primary activities of a number of different models of community-managed financial services currently in use around the world, including SHGs, Accumulating Savings and Credit Associations (ASCAs), and Village Savings and Loan Associations (VSLAs), among others. The use of the proper term “Savings and Internal Lending Communities (SILC)” in this document refers to the specific methodology developed and promoted by CRS in Africa. The SILC Field Agent Guide, included here as an additional resource, is the definitive source for this methodology.

5

to reflect regional realities. Or it is possible that there will be multiple variations on the savings-led theme in the region that build on local traditions and vary from one country to the next. The important thing is that we in the region begin to experiment with savings-led approaches to microfinance, document our experiences diligently, share widely, and innovate based on continuous learning. The SILC Field Agent Guide boldly states that the SILC methodology (and its variants) represents “the most successful poverty focused financial services program to be implemented by several agencies worldwide…It has worked wherever it has been tried, so neither you nor your partners are going to experience failure.” If this is accurate, then the only thing we have to lose is time.

(The “La Victoire” mutuelle in action in Roche-a-Bateau, Haiti. Photo: Kim Wilson.)

6

PRINCIPLES: What it is all about The list that follows identifies 10 core principles and defining characteristics of most savings-led approaches to microfinance. Savings First.

A financial policy based on only credit without savings is not only ethically dubious, but also impractical:

it is like walking on one leg.

—Parker Shipton How Gambians Save

Two leading microfinance practitioners at the Consultative Group to Assist the Poor (CGAP) were asked in a recent interview why CGAP prioritizes savings over loans for poor people. They responded emphatically: “Because poor people prioritize savings over loans!” Community-based savings groups help individuals to protect financial assets. Depositing money into a group cash box or circulating it through the community in the form of loans keeps it out of the reach of family members who might spend it unwisely, savings are available when most needed. Through their savings, poor people can put money away to meet future financial needs as effectively as they can through borrowing from external institutions, only without incurring the debt that all too often overwhelms their ability to repay. Savings-led microfinance does not ignore credit, insurance or the other kinds of financial services that very poor people need. In fact, savings activities make credit and financial capital accumulations possible, since loans are made internally from members’ pooled savings and interest charged on the loans increases the overall wealth of the group. Some savings-led models, most notably the SHG model in India, systematically links savings and internal lending groups to banks. This permits members whose credit needs outstrip pooled community savings to access deeper pools of capital. While linkage to formal financial institutions may be appropriate for some savings groups, it is important to underscore that credit in this model does not depend on linkages to external organizations, but can continue indefinitely based on members’ own savings. Simplicity.

The old microfinance is unnatural. It asks bankers to become social workers or social workers to become bankers…

Here is how the new microfinance works… Promoters organize people, motivate people and

find the poorest ones to serve—activities they do well. For them, these acts are natural.

— Kim Wilson

The New Microfinance.

7

Savings and internal lending groups have proliferated spontaneously around the world because of their simplicity. (See “Scalability” section below.) Savings-led microfinance involves simply the voluntary association of individuals who agree to save money together and make loans to one another from their savings. To be successful, these groups must be well-organized and rule-bound. They do not require highly specialized knowledge like credit-driven models linked to formal financial institutions. Savings and lending groups are facilitated effectively in communities around the world by people with low levels of formal education and supported effectively by NGO staff with no previous microfinance experience. During a recent microfinance assessment in Haiti, CRS staff met with three gender animators at Caritas-DCCH. These animators had no prior history of working in microfinance. Yet over the past decade they have helped form 700 savings and internal lending groups (mutuelles) with over 10,000 members. The director of Caritas Port-au-Prince, added: “We found that it is very difficult to convert credit officers into good mutuelle animators. They are too accustomed to the supplier-customer relationship. We have had much better success with the Women’s Rights Officers.” Self-Management. Groups that practice savings-led microfinance are fully autonomous and self-managing. Because the model is simple, self-management is possible. Because savings and internal lending groups operate exclusively with the capital of their members under rules and regulations that the members themselves develop, self-management is imperative. The principle of self-management is a radical departure from the culture of traditional microfinance, which links poor people to financial service providers on terms set by the institutions. They determine who gets loans, in what amounts, at what interest rates, repaid on what schedule, etc. In community-managed savings-led groups, members set the rules and provide the capital for loan funds. Sensitivity to Local Tradition. External actors who support community-based savings-led microfinance initiatives are most successful when they build on local traditions. As noted in the introduction, ROSCAs and other communal savings and lending practices have been in use for centuries. Their resilience and continued use through extraordinary political, economic, social, environmental and cultural change suggests that they will provide a solid foundation for delivery of financial and other services in the contemporary context. External actors—development agencies like CRS or formal MFIs—can bring additional value to community-managed loan funds with maximum impact and complementarity when they honor the principle of self-management and when they respect the local traditions on which current practices rest. Selection. Members of savings and internal lending groups tend to be poorer and more disadvantaged than clients of traditional MFIs. Despite the extraordinary growth of the microfinance industry, millions of very poor people around the world still lack credit—they don’t qualify for loans from any type of financial institution because they are considered high-risk and likely to default while they have little collateral of value. Countless millions more people are risk-constrained—they may qualify for institutional

8

loans but their livelihoods are so fragile that they themselves are (wisely) afraid to assume the liability for a loan. Although they may be extremely poor, these people have a need for financial services that are being met through membership in millions of autonomous, community-managed savings and lending groups around the world. These groups are self-formed based on social ties and not actuarial risk analysis. They do not have same need as MFIs to be profitable, so they can afford to involve the poorest of the poor in a way that MFIs cannot. Social Assets. A conversation with a woman who belongs to a mutuelle in Haiti:

Q: Why do you belong to a mutuelle? A: I belong to borrow, to save and to be in solidarity with other women.

Q: What would you do if your group no longer made loans?

A: I would still come to meetings to save and be in solidarity with other women.

Q: And what would you do if your group no longer took savings?

A: I would still come to meetings to be in solidarity with other women.

—Lionel Fleuristin KNFP, Haiti

Although savings-led microfinance focuses on the efforts of poor people to build financial assets, social assets are also critical. Friends and neighbors form their own groups based on trust and past relationships, building them on a foundation of existing social assets. As mutuelle members in Haiti explain: “We all grew up together. We have been friends for our whole lives.” Most savings-led microfinance groups are built on this foundation and leverage these relationships to ensure loan repayment. Because loans are made with neighbors’ savings (“hot” money), members are more likely to feel personally accountable to the group and repay their loans. In contrast, default rates are significantly higher among externally funded groups borrowing “cold” money. But social capital is not just a means to accumulate financial capital—it is valuable itself. Savings and internal lending communities increase this social capital by bringing people together to sacrifice, work, learn, hope and progress together. Or, as mutuelle members in Haiti commented, “We find common solutions by putting our shoulders and money together.” These stores of social capital can be drawn upon in times of need as surely as a bank account.

9

Social infrastructure. When savings and lending groups accumulate social assets, they create infrastructure that can support a wide range of community-based activities, such as collective marketing of agricultural products, managing water resources, or lobbying for additional public spending on social projects. Kim Wilson identifies four discrete stages in the life of an SHG. Members derive value from different activities in each stage of group development, generally in this order: (1.) savings, (2.) “interlending,” (3.) linkage to financial institutions and (4.) group consolidation. Although linkage is common in India and unusual among SILCs in Africa, in both cases value migrates within groups over time. “Young” groups are generally focused on “core” activities of savings and internal lending and may not engage in community issues. More mature groups often demonstrate the capacity and willingness to resolve community problems and collaborate to improve livelihoods as a natural part of their evolution. Some observers of social assets have characterized this transition as a move from “private” to “public” use of social assets. Social insurance. Many savings-led models, such as the SILC methodology that CRS developed in Africa, include emergency funds to which members make regular small contributions. In times of acute need, members can draw on this fund with no need to repay. They must be managed in strict separation from community savings, however, since they do not circulate in the community as loans but are given as grants. In Haiti, mutuelles manage this separation with a color-coded cashbox system: a green box for community savings and loan funds, a red box for emergency funds, and a blue box for any loan capital that may come from outside the community.

(Mutuelles in Haiti use a color-coded cashbox system: a green box for community savings and loan funds, a red box for emergency funds, and a blue box for any loan capital that may come from outside the community. Photo: Kim Wilson)

10

The emergency fund is a creative use of savings and provides social insurance to poor people who are underserved by financial institutions. The ability to draw on financial assets in times of crisis helps poor people protect other assets under threat by external shocks, sickness or family emergencies, for example. Sustainability.

Per-client cost-to-serve, via traditional MFIs: $350; via SHG model: $6-$12.

— Kim Wilson

The New Microfinance. Savings-led microfinance is generally more sustainable than traditional credit-led approaches: more sustainable for individuals who are insulated from the risk of unmanageable debt, and more sustainable for the groups themselves, which do not need to generate revenues to cover operational costs, unlike MFIs, whose costs are significant. Group formation, training, facilitation and accompaniment to independence can cost as little as $4 per member. When we define sustainability as continuous unsubsidized operations, savings and internal lending groups are “inherently sustainable,” as the SILC Field Agent Guide puts it.2 Scalability. Only 11% of the world’s poorest families are served through formal MFIs.

There are community-managed groups providing savings and lending services in almost every village in the world.

—Jeffrey Ashe

A Symposium on Savings-Led Microfinance for the Poor Community-based savings-led microfinance is simple, requires minimal external support, and is surprisingly inexpensive to implement. In India alone, more than 30 million people—mostly women—participate in SHGs. The scale of this approach is simply unimaginable for institutional, credit-led microfinance.

2 Former CRS DRD/PQ for South Asia Kim Wilson explains in her article “The New Microfinance” that CRS and its partners in India have developed a “double bottom line” formula for sustainability that moves its focus beyond the group itself and incorporates a consideration of benefits to individual group members: Sustainability = Unsubsidized self-management + Benefit stream to each member. This formulation may be more appropriate for our purposes in LACRO, since the group itself plays only a facilitative role, and since our concern is for the livelihood outcomes of individual participants.

11

PRACTICES: How the approach works (when it works well) Facilitating savings-led microfinance involves four categories of activities: preparation, group formation, accompaniment and replication. The best facilitators get positive results across very different contexts using the practices described below. For more detail within each of these processes, see the SHG and SILC field guides referenced in the “Additional Resources” section. Preparation.

• Do your homework. A facilitator needs to spend time in each community and ask the kinds of good questions that help her to get to know it well. What are the community’s principal assets? What are its main challenges? What are the prevailing livelihoods strategies? How about financial services provision? Are there external financial organizations working in the community? If so, what is their track record? Are savings and lending efforts underway? What are the results? What do people identify as their primary needs? What is their vision for the future? Etc.

• Build on existing traditions. Don’t reinvent the wheel. Bringing new practices into communities where indigenous savings and lending practices already exist is inefficient: facilitators waste time, energy and resources creating services that are redundant and unpopular.

• Invest in community relations. Meet with formal and informal community leaders to understand their perspectives on the important issues facing the community. Explain how savings and lending groups can address issues that are important to the community to build support and get approval for forming groups. Meet with members of the community to explain the savings-led approach. Later, meet again with prospective members of savings and lending groups to further discuss the process and the potential. This investment of time and energy is essential to earning trust, respect and support for the model.

• Communicate clearly and manage expectations. Be very clear from the outset that loans will be made only from members’ savings and not by external agencies. Establish this principle from the beginning and repeat it often, especially during the preparatory and start-up stages of the project. In LACRO, institutional, credit-led approaches represent the dominant microfinance paradigm. Project staff and participants have strong expectations of external loan financing. Even if linkage with a lending institution is possible at later stages of the group’s development, do not present this idea initially. People should decide to participate in the project based on the benefits it promises to deliver even if such linkages never happen.

12

• Choose and train facilitators well. Trainers and facilitators can play a critical role in the process of forming successful groups that become completely independent. Selecting and training facilitators well is very important. Seek facilitators who are patient, enthusiastic and enjoy a high level of trust among the communities in which they work. They foster autonomy and self-management, encourage active participation among all group members and help them to manage group affairs without external support. “Learning Conversations,” developed originally by CRS/South Asia and Freedom From Hunger, are a simply method for sharing small improvements and innovations with and within groups. Facilitators can use Learning Conversations to broaden group learning and activities beyond savings and lending.

Group formation.

• Keep group sizes small. Different savings-led methods offer slightly different numbers for “ideal” group size. The SILC Field Agent Guide recommends 10-25 people (but would allow anywhere from five to 30), while the India’s National Bank of Agriculture and Rural Development (NABARD) suggests 10-20 in its Guide to Forming SHGs (with anything less than 10 being too small). All sources, however, agree on one fundamental point: groups should be small!

• Membership should be determined through self-selection. Members of savings and lending groups work together more effectively if they are bound together not just by pooled savings and lending activities, but their history of working together and playing together. Group members should ideally be friends and neighbors who identify with one another, depend on one another and have some sense of responsibility for one another. Unless groups are intimate and comprised of people who know each other well, the social capital necessary for their proper functioning will not exist.

Accompaniment.

• Facilitate, don’t dictate. Remember, the role of external actors in community-managed microfinance is to facilitate. Facilitators should build capacity, ensure members have the information they need, see that everyone participates and all voices are heard. This ensures that processes are strong and members are capable and well-informed. If the group succeeds, its success should be its own. If it fails, then its failure is also its own and should not be the doing of a development agency.

• Good rules and records. One very important role of the facilitating agency is helping to establish clear and equitable rules of operation and an effective and appropriate system of record keeping. Groups must be rule-bound if they are to effectively manage member savings and loans and embody the principles of participation, self-management and self-help. Groups need to develop an effective record-keeping

13

system that is precise, transparent and appropriate for the educational level of the group’s members. In Mali, where it is not uncommon for all members of a group to be illiterate, savings and lending groups keep account records using memory-based systems and a collective oral history method that features group repetition.

• Meet and save regularly. Group facilitators should emphasize early and often that saving money regularly and participating actively in the formal meetings of community-managed loan funds are critical disciplines to develop. Without a constant stream of savings, there will be no community-managed fund from which to make loans; without the frequent and active participation of a group’s members, it tends toward operational inefficiency and loses its ability to catalyze positive change in the community.

• Charge interest and fees. Saving money is an important way to protect financial assets from loss or theft, but it alone cannot multiply assets. Group members can leverage their savings to expand their financial asset base only by charging interest on internal loans. In most cases, groups find that a flat interest rate is easiest to administer.

• Rely primarily on member savings for loan capital. There is some skepticism within the development community about the ability of very poor households to access meaningful loan financing through community-managed funds that draw exclusively on members’ pooled savings. Since very poor households are not generally able to save large amounts of money, the amount of capital available to members of community-led savings and lending groups is relatively small—smaller in many cases than what might be available through a formal MFI. There are, however, good arguments for working exclusively with loans financed by members’ own savings. Smaller loans are precisely the point of community-based, savings-led microfinance! Often, the amount of money that poor people need—and can responsibly manage—is very small and can in fact be accessed through community savings. This is certainly true for poor people who are altogether new to financial services. Too often, credit-led approaches—and the larger loans that traditional approaches tend to favor—can overwhelm the ability of very poor people to manage and repay their loans. Over time, after savings and lending group members have proven their ability to successfully manage and repay increasingly larger loans, and after they have demonstrated that their growing needs for loan capital outstrip local savings capacity, then accessing external funds may be an appropriate option. More importantly, savings-led microfinance has the potential to do something very different for the communities involved than the traditional MFI approach. Although the amount of money available may be smaller, savings and internal lending groups have endlessly more potential to foster holistic community development than most MFI programs. Jumping immediately—or too soon—into relationships with external lenders in order to access financial capital can negate all the important capital formation processes (see section below on

14

All Loan Funds are NOT Created Equal Community-Managed Loan Funds (CMLFs) are gaining momentum in the microfinance industry as cheaper, lighter, more flexible, more scalable and more sustainable alternatives to formal microfinance institutions (MFIs). The Consultative Group to Assist the Poor (CGAP) reviewed the performance of dozens of CMLFs over the past 15 years to determine whether group success is related to the source of loan funding. The CGAP study (May 2006) reached the conclusion that groups whose loans were financed by an early injection of external capital tended to fail consistently: “Externally funded CMLFs practically never work.”

The most successful groups—savings-based groups and Self-Help Groups (SHGs)—finance all loans through member savings, at least in the early stages of their development. SHGs also started lending activities on the basis of internal savings, and successfully absorbed small amounts of external capital at later stages in their development after establishing a track record of successful internal lending and loan recovery. They had a mixed record, however, in subsequent relationships with formal MFIs or banks.

What are the secrets of the success of savings-led approaches? According to CGAP, it is their reliance on social capital and community-based asset building at the outset. Because loans are made with neighbors’ savings (“hot” money), members are more likely to feel personally accountable to the group and repay their loans. In contrast, default rates were significantly higher among externally funded groups borrowing “cold” money. Furthermore, the savings-led methodology permits gradual capital accumulation that does not overwhelm members’ ability to repay and gives them time to develop essential financial management skills.

CGAP’s recommendation to microfinance practioners? Spend your time and money providing support services, not loan capital.

Source: Murray, Jessica and Richard Rosenberg (2006). “Community-Managed Loan Funds: Which Ones Work?” Washington, DC: CGAP Focus Note

“Potential”) that savings and lending groups naturally foster. So while the rate of financial capital formation may be slower than among groups that access external sources of loan finance, the process is less risky and more likely to foster household and community development.

• Link carefully. “To link or not to link?” That is the question that many agencies are asking themselves regarding the possibility of linking savings groups to formal financial services institutions. The answer is not an easy one. Beyond the pragmatic argument summarized above, e.g., it just doesn’t work, there are more principled objections. Among CRS practitioners implementing the SILC model in Africa, there is real concern about compromising the principle of autonomous self-management and fear of “elite capture” if community-managed groups are linked to external sources of loan capital. Others express thoughtful concern about the very real possibility that access to larger loans—and deeper debt—is not at all what very poor people need. Many practitioners with experience in India, meanwhile, argue in favor of linkages based on the SHG movement model even while they acknowledge that

15

the record may be mixed regarding the impact of those linkages on the sustainability of the groups and/or household well-being.

Organizations accompanying community-led savings and lending groups should be mindful of both the potential risks (unmanageable debt and elite capture, among others) and rewards (access to larger loans and other financial services) of bank linkage, and encourage careful and sober assessment among groups that are considering linkage of their ability to manage and repay additional debt.

• Consider clustering. CRS/India organizes the SHGs it supports in a given area into clusters so they can work together to address the issues that affect them all. CRS finds that this approach increases the influence of the groups and helps them to lobby more effectively for changes in unjust structures and systems.

• Be patient. Organizing savings and lending groups and helping them achieve true independence takes time. The SILC Field Agent Guide prescribes one full year of intensive accompaniment to nurture groups to independence, while Kim Wilson suggests in “The New Microfinance” that it can take up to four years or more for groups to be truly independent. What these assessments have in common is the shared belief that it takes time and patience to facilitate successfully and help new groups achieve sustainability and independence.

Replication

• Foster replication. Finally, facilitators should encourage and actively facilitate the replication of successful savings and lending groups in communities where they might respond to local needs. Facilitating exchanges among members of existing groups and individuals interested in forming new ones has proven one effective way to foster peer learning and replication. Evidence suggests, however, that in many cases replication can take care of itself—“spontaneous replication” has been reported in diverse contexts, with group members fielding constant inquiries from other members of their community or residents of neighboring communities who are interested in starting groups of their own. It is important to be cognizant of this dynamic and to incubate this process.

16

POTENTIAL: What savings-led microfinance can achieve Savings-led approaches to microfinance hold real promise in helping us to advance our vision in the area of microfinance and to help us meet our agency aspiration of promoting integral human development. Promoting savings and internal lending activities offers us an exciting way forward in our work in microfinance at a time when our role in the field and our vision for how to best deliver financial services to poor people are changing. Savings-led microfinance models can help us advance key strategic objectives of MF 2010 by allowing us to more effectively:

• reach down to the poorest in fidelity to our mission,

• facilitate partner-driven and community-led microfinance activities in a truer expression of subsidiarity,

• decentralize management of loan funds to our partners and beyond and.

• expand our client base through low-cost and highly replicable approaches, and

• support linkages with other related programming sectors. This last point is a critical one, since savings and internal lending groups can be linked programmatically to technical interventions in every sector in which CRS works. Savings-led microfinance models have already proven their ability to foster the formation of all six types of capital we identify in the IHD framework depicted in the figure below.

17

Savings-Led Microfinance and Rural Agro-Enterprise Development Savings-led approaches to microfinance are designed to foster the accumulation of social and human assets and have the potential to prepare rural households for deeper engagement with financial markets. A joint study tour conducted by the Rural Innovation Institute (RII) of the International Center for Tropical Agriculture (CIAT) and CRS in 2005 culminated with similar recommendations regarding capital accumulation and market readiness. Given the common focus, explicit linkage of savings and internal lending groups and promotion of the five basic skill sets identified by the study tour represents a high-potential area for programmatic exploration. Savings-Led Microfinance and Market Readiness. Savings-led microfinance builds human assets—promoting financial literacy, imparting basic financial and group management abilities and cultivating leadership skills—while also fostering financial capital accumulation. While many community-managed savings and internal lending communities rely exclusively and indefinitely on member savings for loan finance, others—notably India’s Self-Help Groups—opt to seek additional capital and/or services from formal MFIs and/or commercial banks after building their own financial skills through participation in community-managed financial services. In this sense, savings-led approaches to microfinance may be said to promote “market readiness” among households that are not currently served by formal financial services markets. “Study Tour Skill Sets” and Market Readiness. In 2005, senior researchers and program quality experts at CRS and CIAT’s Rural Innovation Institute conducted a worldwide study tour to examine different strategies for forming farmer groups. The tour culminated with a recommendation: cultivate a portfolio of five basic skill sets among rural farmer groups to help prepare for market engagement—a market readiness focus that parallels the financial market readiness concept outlined above.

Continued on page 17. �

This section explores ways that savings-led microfinance approaches can contribute to the integral human development of poor people by fostering the formation of diverse assets, supporting activities designed to alter the vulnerability context, and affecting change in unjust structures and systems. Financial Capital. As noted above, the primary objective of savings-led microfinance is to increase financial assets among poor people and to advance the goal of poverty alleviation. Savings and internal lending groups protect financial assets by guarding them against theft or family and friends who might use them unwisely. They have also helped members expand their financial assets through interest revenues. Finally, savings groups create opportunities for building financial assets through improved livelihoods strategies and by making money available for revenue-generating activities. In the rural areas where CRS works, this will often mean deliberate linkage of savings and internal lending groups with CRS programs in agro-enterprise development.

18

Savings-Led Microfinance and Rural Agro-Enterprise Development (continued) The study tour itself provides some field-tested support for the thesis that savings-led microfinance and the study tour skill sets are highly compatible: nearly half the groups visited during the study tour were SHGs that had migrated beyond their original purpose of savings and internal lending to work collectively in the area of agro-enterprise. More importantly, one of the five basic skill sets identified by the study tour as critical for farmer group success is building capacity for savings and internal lending. In sum, regardless of whether the point of entry for engagement with rural producers is agro-enterprise development or savings-led microfinance, CRS field staff in the region should give careful consideration to the potential for disproportionate gains by programmatic linkage of savings and internal lending communities and rural agro-enterprise development.

Physical Assets. During a microfinance assessment visit to Haiti, CRS LACRO staff met with a remarkable group of women who invested the financial capital they accumulated through their pooled savings in dairy cows: a form of physical capital that can in turn increase human capital (milk for household consumption) and financial capital (sale of milk). These women were unable to get credit

for their costly purchase—cows cost 7,000 gourdes/$200 apiece—so they formed a group of 15 members for the specific purpose of purchasing cows. Although they had all been members of the same mutuelle for seven years, they decided to create a separate savings group for this particular project. They identified the contribution level they would need to accumulate the 105,000 gourdes/$3,000 necessary to buy one cow for each woman. The women collectively identified the eight members they agreed were the neediest among the group, who would receive the first cows. They purchased the first two cows within three months. During the process, however, the price of a cow rose to 10,000 gourdes/$286. In order to purchase the remaining five cows, the members agreed to a two-month extension of the savings cycle to deal with the increased price. All the women will have a cow at the end of the two-year cycle. In order to lock in the price of the cow, the current purchaser has been paying the owner in installments. Newly formed financial assets can be transferred to physical assets that can contribute to improved livelihood outcomes: livestock for breeding, improved housing materials and livestock corrals to reduce vulnerability and loss during natural disaster, storage facilities for grains to permit income smoothing by selling agricultural products over time, basic infrastructure to process and add value to agricultural production, etc.

19

Human Assets. Savings and internal lending groups contribute directly and indirectly to increased human capital among its members and their families. Participants develop basic skills in numeracy, bookkeeping, group management, and boosts their confidence to take greater initiative. Groups commonly foster further improvements in human assets. One mutuelle in Haiti, for example, creates literacy cells within its membership, linking small numbers of illiterate members with literate members who provide basic literacy training during and between group meetings. In some cases, groups focus more formally on literacy. The curriculum for PACT’s WEP in Nepal includes savings, entrepreneurial development, women’s empowerment and literacy components, and has taught tens of thousands of Nepalese women to read. Beyond literacy, savings and internal lending communities can make an infinite number of connections with agencies that provide technical assistance to boost human assets.

Social Assets. As noted in the section on “Principles” above, social assets is both a means to an end of successful savings-and-lending group activity. Groups are created through self-selection on the basis of existing social assets. Lending activities succeed where loan funds using external capital fail because of the level of social assets operative in community-managed loan funds using members’ own capital. And the collective efforts to find

“common solutions by putting our shoulders and money together” invariably increase social capital in participating communities and create a social infrastructure that frequently turns its attention to addressing the needs affecting the community beyond the membership of the group.

20

Political Assets. The impact of the SHG movement in India on that country’s political landscape is extraordinary. In the formal political sphere, SHGs are an incubator for leadership development among women, many thousands of whom move on to occupy seats on local panchayats, village-level government bodies. Informally, SHGs are active in lobbying government at multiple levels on a range of issues that affect the lives of poor and marginalized people. Additionally, CRS-supported SHGs in India are involved in the direct provision of an enormous range of public services that the state has failed to provide, including but not limited to: digging and maintaining water wells, latrine installation, road construction, school formation and management, and legal assistance for poor people. Mutuelles in Haiti are also engaged in a number of collective actions to address public issues. In one notable case, a mutuelle provided legal services to a child who had been raped by a police officer, acting in the child’s defense and maintaining the dossier on the case in collaboration with a local legal organization. Their efforts were instrumental in the conviction and incarceration of the offending officer.

Natural Assets. Savings groups identify environmental degradation as a primary obstacle to sustainable livelihoods. Among the rules of the Mutuelle Solidarité in Haiti is the following: “Fight against cutting trees. Use gas stoves.” Through linkages with external providers of technical assistance in natural resource management (NRM), savings and internal lending communities can work to increase natural capital through

efforts to improve soil quality, prevent soil erosion, replenish aquifers, reforest areas that have been deforested, etc. Shocks: Disaster Prevention and Risk Mitigation In India, where recurrent and seasonal weather patterns lead every year to human fatalities, loss of livestock, destruction of homes and crops, and loss of valuable topsoils, CRS works with SHGs to change the vulnerability context. Through NRM strategies to prevent soil erosion, community-based early warning systems, assembly of life jackets using recycled plastic and other simple, inexpensive activities, CRS helps SHGs to implement effective risk reduction and disaster mitigation programs that save lives and reduce the economic dislocation associated with natural disaster.

21

Structures and Systems: Advocacy for Change The collective action of SHG members is not limited to the issues identified in the section on Political Capital above. Because more than three-quarters of SHG members are women, and an extraordinary proportion are also from the lowest Indian castes, the political action of SHGs focuses on a range of institutions deeply embedded in Indian society that contribute to the social exclusion of women and “untouchables” from Indian society and limit their opportunity. These include domestic violence and rape, dowry abuse, and caste-based discrimination. Conclusion. In sum, the potential of savings and internal lending communities as platforms for community development is extraordinary. While these processes must be community-led, CRS has a critical role to play as a facilitator and provider of technical assistance and related services. We—and the communities we serve—are limited only by our imagination.

22

ADDITIONAL RESOURCES SHG microCredit Innovations Department. “A Handbook on Forming Self-Help Groups (SHGs),” India: National Bank for Agriculture and Rural Development. Catholic Relief Services, “Self-Help Development: Practices, Principles, Golden Rules,” CRS/India. SILC Allen, Hugh (2006). “Savings and Internal Lending Communities (SILC): A Field Agent Guide,” Baltimore: Catholic Relief Services. Vanmeenan, Guy (2006). “Savings and Internal Lending Communities (SILC): A Basis for Integral Human Development (IHD),” Nairobi: Catholic Relief Services, East Africa Regional Office. SILC FAQs. Catholic Relief Services, East Africa Regional Office. Other CRS Resources Aldana, M., G. Burpee, G. Heinrich, T. Remington, K. Wilson, J. Ashby, S. Ferris, C. Quiros (2007). “The Organization and Development of Farmer Groups for Agroenterprise: Conclusions from a CRS & RII-CIAT Study Tour in Asia, Africa and Latin America,” Baltimore: Catholic Relief Services. Catholic Relief Services (2007). “Preparing Farmer Groups to Engage Successfully with Markets, A field guide for five key skill sets,” Baltimore. Burpee, Gaye and Kim Wilson (2007). “Haiti Microfinance Assessment,” Catholic Relief Services, Latin America and Caribbean Regional Office, unpublished. MacGregor, Matt (2007). “Rationale for Savings Led Microfinance and Self Help Groups,” Catholic Relief Services, Latin America and Caribbean Regional Office, unpublished. -- (2007a). “Catholic Relief Services and the Savings and Internal Lending Communities (SILC) Model; Principles and Practices,” Catholic Relief Services, Latin America and Caribbean Regional Office, unpublished. -- (2007b). “How to Form Savings Led Microfinance Groups: Golden Rules, Guidelines, and Steps,” Catholic Relief Services, Latin America and Caribbean Regional Office, unpublished. -- (2007c). “How to Form Savings Led Microfinance Groups: Golden Rules, Guidelines, and Steps—Annexes,” Catholic Relief Services, Latin America and Caribbean Regional Office, unpublished.

23

CRS-Related Resources Wilson, Kim (2002). “The New Microfinance; An Essay on the Self-Help Group Movement in India,” Journal of Microfinance: Volume 4, Number 2 (217-245). Wilson, Kim and Gaye Burpee (2008). “Filling the Blue Box: Mutuelles, Self-financing and Financial Services in southern Haiti.” Working Paper: Tufts University.