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Helping the poor to save


A new model of microfinance for the very poor is spreading

“MY GROUP has rescued me and my children from poverty,” says Faustina Kwei, rearranging baskets piled high with cassavas and plantains around her market stall in a poor suburb of Accra, Ghana’s capital. She used a combination of savings, dividends and loans from a savings group to rent her stall and buy stock. For the first time, she can feed her two children well and send them to school.

Ms Kwei (pictured) is one of millions of poor people to have benefited from the hottest trend in microfinance: village savings and loans associations. Millions of people like her survive on meagre and erratic earnings. Access to the simplest financial services can help stabilise their incomes, which in turn makes them less vulnerable to diseases and natural disasters. An unexpected flood or fever can push a poor family into utter destitution, or the muscular arms of loan sharks.

Most of the estimated 2 billion people who live on less than $2 a day do not have access to formal banks. Over the past 20 years, legions of microlenders have tried to extend financial services to them. But some communities—the poorest, the least densely populated and the most remote—are not attractive to traditional microlenders. And the poorest of the poor are often wary of racking up any kind of debt, even a small one. Some economists argue that what the poor really need, if they are to manage their cash better, is savings.

CARE International, a charity, began a novel scheme in Niger in 1991 to help the poor save—a basic form of banking called a village savings and loans association. This is based on savings rather than debt and managed by members of the community rather than professionals.

Since then, CARE and other NGOs, including Plan International, Oxfam US, Catholic Relief Services and the Aga Khan Foundation, have promoted village savings. The schemes are so successful that they are now spreading across Africa, Asia and Latin America—savings groups now have 4.6m members in 54 countries.

People like these schemes because they are easy to understand, says John Schiller, a microfinance expert with Plan International. And returns on savings are extremely high—generally 20-30% a year. Borrowers typically pay interest rates of 5-10% a month on loans that usually have to be repaid within three months. The rates may seem usurious but they are set by people who are in effect lending to themselves and saving the interest that they charge.

A village savings scheme typically involves a small group (perhaps 15-30 people) who pool their savings. Each buys a share in a fund from which they can all borrow. All must also contribute a small sum to a social fund, which acts as micro-insurance. If a member suffers a sudden misfortune, she will receive a payout.

Members select leaders and draft a constitution. The rules spell out how often the group will meet, what interest rates it will charge and what loans may be used for. At the end of a cycle (usually about one year), all the money accumulated through savings and interest is shared out according to members’ contributions, and a new cycle starts. Once members have mastered the system, the groups they have formed can take on additional tasks such as providing training in agriculture, health, leadership and business.

Members may go on to spread what they have learned to other villages. Ms Kwei’s village scheme shared its accumulated savings and dividends after nine months. With her portion she was able to register her family for Ghana’s National Health Insurance Scheme and pay rent on her market stall. Now Ms Kwei plans to organise other women in her home town of Abokobi, near Accra. Savings could improve their lives, too, she reckons.

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