Microfinance Lessons Learned by Experience

I wrapped up my International Development Fellowship last week and this is my final post for the CRS Blog. There is so much I could still write about savings-led microfinance. In the end, I decided that since the process of organizing and training savings groups has been a new experience for me, I would summarize some of the lessons that I’ve learned over the past several months. This is not an exhaustive list by any means, but I’ve tried to highlight the main points.

1. The group’s autonomy is essential! Although it can be easy to fall into the trap of “prescribing” certain rules and principles based on other groups’ experiences, we’ve learned that the most successful groups are those whose members make their own decisions (and learn from their mistakes in the process). That means that the animator acts as a trainer and facilitator, but that the members retain full ownership of their group’s rules-making, elections, and financial processes.

2. Savings groups are not just about improving poor people’s access to savings and credit. The secondary benefits—solidarity, empowerment, leadership and financial management skills, plus others that depend on the group’s objectives—can improve gender equity, change village dynamics, and promote increased community participation. This is important to emphasize when making the initial pitch to local leaders, because it can build community support for savings-led microfinance initiatives, even among those who are not members of the savings groups.

3. External donations are not necessary or desirable. In fact, studies and CRS’ experiences with savings groups in different countries have shown that external financing of savings groups erodes their independence and sustainability.

4. Savings groups are a cost-effective and useful component of virtually any development program. We’ve seen them succeed as complements to educational and HIV/AIDS projects in Guatemala, and CRS has successfully integrated savings-led microfinance into agro-enterprise, food security, and health projects. (Please see last week’s post for more information about how CRS Guatemala is incorporating savings-led microfinance into other projects.)

5. How much the groups decide to save is far less important than the members’ commitment to meet established savings targets. One of the chief criticisms of savings schemes targeted at the poor is that they are unable to save. Yet the argument ignores a growing body of research demonstrating that even the extreme poor are able to save very small amounts, a finding which has been strengthened by the success of savings-led microfinance across the world. It doesn’t matter if members are only able to save $0.10 every 15 days (which was the minimum requirement for the Salvadoran savings groups I featured in an earlier post). If members can make consistent contributions, these seemingly insignificant amounts can have a big impact over time. Furthermore, as lesson #2 indicates, the additional benefits of participation in a savings group—i.e., learning how to manage money more effectively, taking on leadership positions within the group, and having access to credit through loans and a social safety net through the social fund, to name just a few—can be just as important as the financial savings.

6. Start with savings first, then proceed to lending activities. Whereas traditional microfinance focused on the economically active poor who could make use of very small loans to generate income through microenterprises, savings-led microfinance targets the poor and extreme poor. It is important to build members’ assets through savings and build the fund to a sustainable level before conceding loans. This extra time can be used to offer additional training on how to evaluate loans, determine interest rates and terms, and recover losses if defaults occur. (Imagine what might happen if a group started loaning money immediately without any training, the recipient was unable to repay the loan, and the entire fund was wiped out. Most, if not all, members would lose confidence and the group would probably dissolve.)

7. Groups require ongoing training and support. Even though the animators provide training sessions on the organization and administration of savings groups, it is virtually impossible that this training covers all the challenges and issues that the groups will face. Moreover, many times group members need motivation to attend meetings or continue saving, especially at the beginning when the amounts saved are small and they are foregoing immediate gratification for long-term needs. The animator always respects the group’s autonomy and promotes self-governance (see #1), but he or she can provide valuable guidance and facilitation until members decide that the group is stable enough to operate on its own.

8. The safety of the money is key. The amounts may be small, but they are in no way insignificant to the members, who are often making huge sacrifices and lifestyle adjustments to be able to set aside that money. Therefore, it is essential that all financial transactions occur when the entire group is present. This, plus the use of registers and individual savings booklets, ensures transparency. No single person can have access to the money, so the person (treasurer) who keeps the cash box does not have a key (and the two members who have the keys should not be this person’s family members or next-door neighbors). The treasurer and his/her family must be responsible, trustworthy, and have a safe place to store the cash box. Once the fund reaches a certain amount, the group may decide to liquidate the fund and distribute part or all of the savings and income generated from the interest rates to members. Another option is to deposit the money into a joint savings account at a microfinance institution, cooperative, or bank, provided that the terms (fees, interest rates, and access) are acceptable.

9. Savings-led microfinance is a learning process. That’s true for CRS, the local partner, the animators, and the savings groups. Not only is it a relatively new field, with all the requisite bumps and hiccups, but the approach to each group needs to be adapted to the local context and the members’ needs and goals. Therefore, it is critical that CRS and partner staff participate in periodic technical trainings, which can then be passed on to the animators and groups through training-of-trainer workshops. At the same time, flexibility, adaptability, a willingness to reflect on the challenges, and creativity in addressing them are crucial traits to have.

Looking back at the past few months, I’ve realized how much I still have to learn about savings-led microfinance. Nevertheless, I am certain that, when done right, it can be an extremely effective development tool. After all, not only does it increase the poor’s access to financial services, but it has the potential to promote integral human development. And that, in the end, is what we’re trying to achieve.

Thanks for reading!

– Ben Hess

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One Response to “Microfinance Lessons Learned by Experience”

  1. Brigitte Frey Says:

    Dear Ben.
    I highly appreciate your lessons about Microfinance. It will assist me very much with our farmer’s groups in Kenya. Please see http://www.sofdi.com. We have just started to encourage farmers groups to come up with “business ideas” and your lessons are very valuable. I shall have them printed out and let our farmers read them as well.
    Thank you!
    Brigitte Frey
    founder/director SOF-DI

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