Misty Lefrandt and Dr. Todd Manwaring, Ballard Center for Economic Self-Reliance

This research was used by the conveners of Opportunity Collaboration, an international poverty alleviation conference, to assess the value of inviting savings-led microfinance programs to the 2010 event. The major considerations are a) what is the basis for a savings-led model, b) what is the current terminology, and c) who are the main organizations involved at this time.

First introduced as the solution to global poverty, microcredit has now been around for over 30 years. However, only eleven percent of the world’s 235 million poorest families are served through microfinance institutions (MFIs) worldwide, while ROSCAS (Revolving Credit and Savings Societies and other locally controlled savings organizations exist in virtually every village. 1Since savings models require less oversight than a traditional MFI they are more likely to grow horizontally through a country creating informal savings groups even before the real infrastructure is available.2 While savings at the Base of the Pyramid (BoP) is an obvious necessity, personal savings is difficult no matter what the economic status of the individual. This is because savings requires people to override a natural tendency to prioritize the present over the future.

Harvard University economist Sendhil Mullainathan found that poor people spend a greater share of their income on so-called temptation goods like alcohol or take-out food. He argues that “as income goes up people are indeed tempted by pricier goods – iPods rather than candy, for instance. But the prices of temptation goods do not rise as steeply as income. Think about it: Even the wealthiest people seldom buy cars or houses on a whim. Instead they tend to indulge in smaller-ticket items like cell phones, shirts, and shoes. But when poor people give into temptation, they pay a greater share of their income than their richer counterparts do. As a result savings is often more difficult for the poor than the rich.”3

Poor people do have surplus money to save, even people earning less than $1 per day spend money on non-essential items such as alcohol, tobacco, or televisions.4 So, the question is what financial products could enable the poor to save for the future? Many poor people save their money by stashing it under their mattress or invest in livestock, land, or informal savings agreements. Some rural savings accounts are available, but require a fee, meaning that very few rural poor put their money into savings accounts.5
Yet many poor people say they want to save more money. For example, in a study conducted by Innovations for Poverty Action researchers found that 79 percent of rural bank clients in the Philippines reported dissatisfaction with their current savings.6 In order to enable the BoP to save financial products must do two things, assist them to overcome behavioral barriers to savings and create incentives like security, stability, and interest rates. There are three main types of savings-led models, Rotating Savings and Credit Associations (ROSCAs), Accumulating Savings and Credit Associations (ASCAs), and Chit Funds. These represent a variety of savings structures while all are focused on encouraging and rewarding savings for the rural poor.

ROSCAs are the most well-documented and common structures for rural savings programs. These often begin organically and do not have a central NGO moderating them. Members self-select into the group usually meaning that friends or relatives belong to the same ROSCA. Members meet in one of two ways, weekly or monthly, or according to seasonal cash flow cycles (this is particularly common in agricultural communities). Each member contributes the same amount each month and then one individual takes the whole sum once. The strengths of this structure include simplicity, transparency, safety, and relatively low risk. Simplicity is paramount because the majority of members have little to no education and almost all members are illiterate. Transparency and safety are achieved since every transaction is seen by every member meaning everyone is aware of the status of their savings. Also, personal savings are kept outside the home keeping making it more difficult to lose, be robbed away, or have relatives demand it as is common in many African cultures.7 The inherent weakness in the ROSCA model is personal motivation and a lack of earned interest as an incentive. If, for example, an individual is the first to receive the group sum of savings the motivation to continue contributing is significantly lowered. Due to the self-selecting nature of ROSCAs as well as the fact that most group members are close friends and relatives, this is usually not a problem. The lack of earned interest however is a more pressing issue. Without the motivation of earning interest as a reward for delaying gratification some members will drop out of a ROSCA prematurely.

ASCAs are similar to ROSCAs in that they are informal, member-run structures; however they are different in that members appoint one individual to manage the internal fund, distribute the withdrawals and distribute the surplus. Withdrawal is not mandatory as with a ROSCA and when a member repays their withdrawal they repay with interest (like a loan). The accumulated interest is then distributed to all members.8 The unique strength of ASCAs is the ability for members to earn interest on their savings as well as having access to larger lump sums of money. The tradeoff is that transparency and simplicity are decreased since not all members see every transaction and the management requires more complex calculation.

Chit funds are practices mainly in India and can be informal, member-driven structures or managed by more formal financial institutions. The only difference between a Chit fund and a ROSCA is distribution. A Chit fund can be distributed through the group by an auction, random drawing, or (similar to a ROSCA) on an appointed schedule. Chit funds are also commonly used by members as a “special purpose fund”. For example, members will choose a holiday like Deepavali and a purpose like making sweets. Then all members will contribute the same amount and one will take the fund and purchase all the sweets for Deepavali.9 Chit funds are often cited as a weaker model due to the fact that many organizers have run ponzi schemes in the past collecting funds and leaving town afterward.

References

1. Daley-Harris, Sam. “State of the Microcredit Summit Campaign Report.” (2002): 14. Print.
2. Ashe, Jeffrey . “Savings Led Microfinance and the Rural Poor.” (2005): Print.
3. Karlan, Dean. “Helping the Poor Save More.” Stanford Social Innovation Review. 8.1 (2010): 50. Print.
4. Banerjee , Abhitjit , and Esther Duflo. “The Economic Lives of the Poor.” Journal of Economic Perspectives. 21. (2007): 141-67. Print.
5. Rutherford, Stuart. “The Poor & Their Money .” (2000): Print.
6. Karlan, Dean. “Helping the Poor Save More.” Stanford Social Innovation Review. 8.1 (2010): 50. Print.
7. Rutherford, Stuart. “The Poor & Their Money .” (2000): Print.
8. Grant, William J., and Hugh Allen. “CARE’s Mata Matsu Dubara (Women on the Move) Program in Niger.” Journal of Microfinance. (2002): 46. Print.
9. Klonner, Stephan. “Understanding Chit Funds: Price Determination and the Role of Auction Formats in Rotating Savings and Credit Associations.” Economic Growth. (2009): Print.