Savings Clubs, Variation on Microfinancing Theme

Ben Hess is a CRS international development fellow living in Guatemala and working with savings-led microfinance programs.

In 1974, Muhammad Yunus, a Bangladeshi economics professor, lent the equivalent of $17 to 42 rural basket-weavers after hearing poor Bangladeshis recount how they were forced to borrow money at outrageous interest rates from usurious moneylenders because no formal bank would offer them loans. Yunus went on to found the Grameen Bank, which provides the poor—especially women, who account for 97 percent of loan recipients—with small loans for income-generating activities. To date, the Grameen Bank has provided more than $7 billion to approximately 7.5 million borrowers, with a repayment rate of 98 percent. Over time, other microcredit institutions were established across the globe. They eventually expanded their operations to offer a variety of financial services to the poor. “Microfinance” is a broader term that incorporates these different services, including credit, savings, and insurance.

One of the chief criticisms of traditional microcredit and microfinance, however, is that providing loans to poor people can place them further in debt if the investments do not generate enough income to pay off the balance and interest. Furthermore, microfinance institutions focus their services on microentrepreneurs, which exclude the very poor.

As a result, a new microfinance model was developed in India among its self-help groups, which were originally composed of poor women. In addition to promoting women’s empowerment, autonomy, and solidarity, these groups emphasized a savings-led approach to microfinance. For a long time, development experts assumed that the poor spent all of their income to cover basic needs. Studies have shown, however, that even the extreme poor are able to save very small amounts. Savings-led microfinance seeks to encourage a “culture of saving” among the poor, since savings can provide a safety net in the case of emergencies and enable them to expand their physical, social, and economic assets. Furthermore, groups use the accumulated savings to offer loans to their members at more affordable rates than formal banks and microfinance institutions, with the profits from the interest going back into the group fund.

The beauty of the savings groups is their simplicity. Group members establish their own rules, elect their leadership committees, and determine when and how much to save and loan. While CRS and its local partners provide training on the savings-led method and help form savings groups, they do not provide external financing. Although this may mean that groups grow more slowly, it also reinforces their autonomy, solidarity, and sustainability. Another benefit is that the savings groups are easily replicable. In many cases, members of existing groups help form new groups.

Recently, CRS has expanded its savings-led microfinance efforts to Latin America. It is especially interested in forming savings groups as a complement to ongoing projects in agriculture, health, and education. In Guatemala, where I work, CRS has helped form savings groups among persons living with HIV in Coatepeque. It has also trained community animators and staff at the Women’s Pastorate of the Diocese of San Marcos on the savings-led method so that they can organize savings groups among women whose children receive scholarships to attend school. Please check back here soon for updates on both of those initiatives.

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