The Benefits of Informal Savings Groups

Over 70% of people in emerging markets do not have a formal bank account (Goss, Mas, Radcliffe, & Stark, 2011). Despite exclusion from what we consider formal banking, many people in emerging markets have figured out their own ways to save money. An increasing number of people are participating in informal savings groups.

Our goal in this series is to explore the effectiveness of savings groups. In this post, we’ll explain how they work and what the existing benefits are. Next week, we’ll explore their inefficiencies and ways the increasing availability of mobile money services can provide the opportunity to make them more effective.

What is an Informal Savings Group?  

An informal savings group is a social organization formed to help community members save money for specific purposes (either individual or community level). The two most common examples are Rotating Savings and Credit Associations (ROSCAs) or Accumulated Savings and Credit Associations (ASCAs). ROSCAs function by taking monthly deposits from each member of a group and then giving the whole monthly sum to one member of the group.  The recipient of the monthly sum is based on a predetermined rotation, ensuring each participant will eventually receive a large payout. ASCAs also require group members to make regular contributions. Instead of rotating payouts, the ASCA group fund is used to make loans that are paid back with interest. Loans are made either to group members or trusted third parties.  After a certain period of time (often six months to a year) the group fund and its proceeds from interest are paid back to the original members.

rosca vs asca

How Informal Savings Groups Work

Groups have different names and missions across countries. In South Africa, for example, you’ll find makgotlas for funeral expenses or stokvels for group purchasing or community entertainment. In Kenya, you’ll often find groups designed to save for a large investment that benefits the community, usually investing in a business or the Nairobi Stock Exchange.

Regardless of the name or purpose, most groups have a similar structure and protocol. Members are required to make a small monthly contribution to the community fund. Groups usually have 15-20 members and are governed by a strict set of rules, either written or unwritten, depending on the group’s literacy. Breaking the rules is considered “taboo” and comes with social repercussions and possible financial penalties.

According to FinMark Trust’s FinScope survey, there were roughly 37 million people participating in some kind of informal savings group in East Africa as of 2009. In West Africa, Nigeria alone had nearly 41 million people participating in such groups (Napier, 2009). The value these individuals gain from participation in a savings group includes both tangible economic benefits as well as intangible social benefits.

How Do Informal Savings Groups Provide Economic Benefits to Their Members?

Reducing Pressures on Free Cash

In emerging markets, an individual’s cash flows are highly uneven and cash on hand is subject to the pressures of family members and friends. Women in particular find that control over their money is limited, too often due to a frivolous or alcoholic husband. These circumstances make it nearly impossible to save a sum of money large enough to invest in a piece of equipment that would improve a business, purchase materials for home improvement, or make any other large purchase to increase quality of life. Savings allows members to shed the pressure placed on their free cash by husbands, neighbors, and friends. Ultimately, this enables people to commit their surplus cash towards future purchases with the potential to improve their quality of life.

Enabling Access to Funds for Unexpected Life Events or Large Purchases

Having access to a financial savings tool makes it possible to access to a pool of capital in case of emergencies or save money for a large purchase. In case of unforeseen illness, members can rely on their group members and the resulting group fund to quickly take out a loan. Ultimately, group members have to repay the loans or end up contributing the same amount over twelve months as if they had saved the money themselves, but participating in a group creates additional flexibility and builds a social structure that creates discipline. Such discipline also enables members to save up for large purchases, since the cash is safely put away for extended periods.

The Importance of Social Capital to Informal Savings Groups

Informal savings groups in South Africa provide fascinating insight on the importance of social capital to group members.  South Africa has the most developed formal banking sector in sub-Saharan Africa, where 63% of the country has access to formal banking as of 2011 (Khumalo, 2011). Yet, surveys have shown that nearly 90% of members that save primarily through ISGs also have a formal savings account (Irving, 2005). These members choose to participate in an informal savings group because the social structure it provides creates benefit that cannot be realized by saving at a bank. There are three key benefits that the group’s social structure creates:

  1. Disciplined Saving:  As mentioned briefly above, involvement in a group forces members to set savings goals and meet them each month. The negative repercussions (both economic and social) associated with failing to meet these goals create significant incentive to meet the monthly commitment. Maintaining this level of discipline is much more difficult as an individual, making group membership more appealing.
  2. Increasing the Strength of Social Networks:  Working together towards the same financial goal as part of a group that meets each month creates strong bonds. It is common knowledge in the Western world that you are more likely to get a job if referenced to a potential employer by someone you both know.  This principle works the same way in the developing world. Individuals are able to leverage other members of the group to further create opportunities for themselves.
  3. It’s Fun:  It is important not to forget the human aspect of informal savings groups.  Groups are formed with trusted friends or family and can often be a perfect excuse to get together once a month to socialize.  Beyond just the economic opportunities, savings groups also offer a more enjoyable way to save money in comparison to simply visiting a stuffy bank branch to make a deposit.

Rotatory saving and credit associations

A rotatory savings and credit association is a group of people who agree to meet for a certain period of time in order to save money together. This enables everyone in the group to have access to loans. F.J.A. Bouman described ROSCAs as “the poor man’s bank, where money is not idle for long but changes hands rapidly, satisfying both consumption and production needs.”[1]

rotatory-saving-group-in-Mali

Application across different cultures

Rotatory saving as a mean to access financial loan is widespread in many regions in the world. It is known as tandas in Latin America, partnerhand in West Indies, cundinas in Mexico, ayuuto in Somalia, hagbad in Somaliland, susu in West Africa and the Caribbean, hui in Asia, palawugang in Philippines, Gam’eya in Middle East, kye in (계) South Korea, tanomosiko in (頼母子講) Japan, pandeiros in Brazil, juntas or quiniela in Peru, C.A.R. Țigănesc/Roata in România, and arisan in Indonesia.

The structure of rotatory saving

The meeting sessions for these groups are based on member’s agreement. At the meeting each member contributes some amount and only one member (loan receiver) gathers all the amounts once. It is usually agreed that the loan receiver pays back the original loan plus a very small interest. This helps members have access to larger loans at the future. Since each transaction is seen by all the members and no money is kept, there is high transparency and trust inside such groups.

These groups have two very important features that give the low-income class of a society extra benefit. One, normally due to the unstable economics and inflationary conditions in some societies, purchase power for an accumulated saving is gone or weakened. A rotatory saving group provides loan is relatively shorter time and easier process to the loan applicants. Two, credit associations and banks mostly prevent to serve credit worthy borrowers due to operation costs, regulations or other reasons. Meanwhile in a rotatory saving group the members known as highly creditable.

Usually the members in these groups select each other; this ensures the security and trust among the members. In some countries, Brazil for instance, a third party agent or intermediary hemps forming the group and process the continuous affairs. This is what Care organization is doing in some parts of the world. They provide a simple lockbox, train agents to teach VSLA groups and administrate this ongoing process till the end of each loan cycle.

How Care organization works on international development?

Care has spread standardized Accumulating Saving and Credit Associations (ASCAs) to reach 2 million people in Africa[2]. These standardized ASCAs are called Village Savings and Loan Associations (VSLAs), and they usually comprise 10 to 20 participants who conduct saving and loan activities for a fixed period, usually 12 months. Unlike informal ASCAs, these use a triple-locked box to secure the funds, have standardized election procedures and maintain a careful separation of various duties, such as record-keeping, money-counting, meeting facilitation etc. Interest rates on loans typically vary from 5-10% a month, while cycle-end pay-outs in most groups range from 30-60% of invested capital[3].

As of the end of June 2012 development agencies (including CARE, Oxfam, CRS and PLAN) were carrying out projects reaching 1.8 million members in 23 countries, mostly in Africa. The Savings Group Information Exchange, a project of the Bill and Melinda Gates Foundation, provides researchers with an on-line database where indicators like savings and loans per member, country, return on assets and percentage of female members can be compared.

References:

1. F.J.A. Bouman, Indigenous savings & credit societies in the developing world in Von Pischke, Adams & Donald (eds.) Rural Financial Markets in the Developing World World Bank, Washington, 1983
2. William J. Grant & Hugh Allen. CARE’s Mata Matsu Dubara (Women on the Move) Program in Niger. Journal of Microfinance, Brigham Young School of Business, Provo, Utah, Fall, 2002.
3. Hugh Allen and Mark Staehle. Village Savings and Loan Associations (VSLAs) Programme Guide, Field Operations Manual. VSL Associates, Solingen, 2007.

The human potential

 

The definition

I think human potential can be defined as hidden, unrealized or unused inner talent. Potential is a magic power that can change our lives. Within us, there is an infinite world of talents, powers, beliefs and capabilities. Human beings are a very special creature which their full potential has not been discovered yet!

 

Personal talent

As you know, there are no identical fingerprints on earth. It can possibly mean we have unique souls which are obtained from a heavenly source.  You probably have met a friend who is really talented in drawing, one who is excellent in communication, a very talented athlete or probably a friend of yours who is naturally good at playing music instruments. They easily impress everyone with their amazing performance.  They own this amazing power which they can demonstrate and amaze everyone.

Many people though are still unhappy and looking for happiness. They may spend many years trying to find what they love to do. They might sense that something is going on, some talent is to be discovered and enjoyed. Once man finds his favorite activity, profession or job life finds a different meaning afterwards.

The simply looking “human potential” discussion might reflect its effect in much bigger spectrum. It is presented in socioeconomic sciences that social processes are formed by economic activity1 that is directly linked to human potential. An entrepreneur, small businesses and local factories all can drive the economic cycles of a community and make big changes.

Nevertheless lack of capital, ignorance, poverty or illiteracy and many more items could be the main drivers of underdevelopment. The least developed countries (LDC) based on the UN, represent the countries with the lowest socioeconomic indicators.

Therefore many skilled people are unfortunately ignored or they will not be able to access funds, loans, educational and health services.

 
social potential

Social potential

By considering our individual talents and the unique internal power inside us, we are free to take a path towards our redemption. Once human potential is discovered and flourished, a social community can easily find its path towards development and growth.

Social development is a win-win situation for everyone. Providing potable water in a remote Asian suburb or creating sustainable job opportunities in an African country brings positive changes to the whole world. Development of a community, reduced illegal immigration, creates local jobs, brings equal income opportunities and so on.

 
cumulative potential

Responsibility

We can enter in a state of awareness in which we start to live differently. We can help ourselves by helping others. It’s impossible to turn a candle on for another one and yet stay in darkness.

Why not spending the “personal talent” for “social benefit”? As a unite community, everyone should be able to find his “inner potential” and flourish it. Also some people might play the leadership role. Special people among us such as sport champions, well known artists, public faces and celebrities are expected to participate more and more in social transformation. Angelina Jolie2 and David Beckham3 are two examples. Inequality, poverty, women rights and many such issues can be more easily treated if the “special people” who has “personal talent” start to play a bolder role.

SwissJumpRope as an athletic campaign seeks for two important targets:

One: We can start using our talent to do a positive activity that benefits many people. We can do fundraising for a good cause, provide free tutorials for those who want to learn something, share our food with someone in need. There’s no rule neither a limit. You can choose your favorite way to turn on a candle for others. It’s up to you!

Two: We can help others find their own talent, work on it and flourish it. This way many the talent is shared among many more people and this cycle never stops. For instance, what SwissJumpRope is focusing on is to promote local associations which provide loans to local people. By the use of microloans, we hope that the loan borrowers take one step toward unlocking their potential!

 

References:

  1. https://en.wikipedia.org/wiki/Socioeconomics
  2. https://www.undispatch.com/why-angelina-jolie-means-so-much-to-the-united-nations/
  3. https://www.unicef.org/media/media_85619.html

 

 

 

What is Village Saving and Loan Association program ?

vsla members
Micro loans that change lives

What is VSLA?

Village Saving and Loan Association is small groups of people who save their money together and by turn make use of these saving as a loan. As this activity goes on, saving become more accumulated hence members can earn more profit. In comparison with conventional financial services, VSLA provides a relatively simpler procedure for loan applicants.

Informal ways of saving among groups has been going on for years in numerous parts of the world. VSLA provides a clearer way of loan payment. This is a flexible method which can easily be implemented in rural regions to empower the local people.

There is usually a committee member team which is elected every year by the members. The committee members have clear roles but not limited. This is to make sure everyone plays a role in the whole system.

Every group has around 15 to 25 members which voluntarily choose to be in the group. Every week the group members meet and they decide to purchase a share in order to save.  The share price is determined by the group.

flexible saving scheme

Since the saving is flexible across the members, the system is very simple but is strong. The members do not have to save as much as each other. This allows the members with lower income to save more frequently though smaller.


VSLA


All savings are accumulated in form of loan which members can borrow later. Each member can borrow as much as three times their individual savings. Loans are for a maximum period of 90 days in the first year and loans may be repaid in flexible instalments at a monthly service charge which is determined by the group.

social loan

Social loan is a new service that provides members with a basic form of insurance. This loan functions as a community safety and may serve is special occasions – such as emergency assistance – for the entire community which includes members and non-members. Social fund is not aimed to grow, but is set a level which covers basic needs.


DSC_02001


The VSLA group does not use a complex accounting system. To record the individual saving and loan liabilities of the members, VSLA passbooks are used. This is appropriate for members with limited literacy. The Lock box contains the material, passbooks, loan funds and social funds which is safeguarded by the group box-keeper between meeting.

Swissjumprope as an athletic campaign, seeks to support women. Through the VSLA program which has been started by Care organization since 1991, you can read more about VSLA  or start donating online through Care’s international secretariat in Geneva, Switzerland .

References:

http://www.vsla.net/aboutus/vslmodel