FROM MICROFINANCE TO MICROSAVINGS: A PERSONAL JOURNEY
I have worked in microfinance almost from its inception in the early 1980s, working to create and evaluate microfinance institutions (MFIs) in thirty-five countries, including the United States.
Through my position at Accion International, I joined the movement to create a “best practice” model of microfinance project design: large-scale, well-managed, permanent financial institutions that provide credit (and sometimes savings and other services) to those not reached by traditional banks.As I continued to design microfinance projects in eastern Europe, Africa, Asia, and Latin America, I began to look closely at the different self-managed savings and lending clubs that poor people around the world used to meet their basic financial needs. People joined zadrugas in Bosnia, equibs in Ethiopia and Eritrea, tandas in Mexico, cadenas in Colombia, tontines in West Africa, chit funds in India, merrygo-rounds in East Africa, and partners in Jamaica. These are only a few of the hundreds of variations of what are technically referred to as Rotating Savings and Credit Associations (ROSCAs). In The Poor and Their Money, Stuart Rutherford and Sukhwinder Arora call this process “the world’s most efficient and cheapest financial intermediary device” because “at each round the savings of many are transformed instantaneously, with no middlemen and no transaction costs, into lump sums for one person.”2
As the 1990s went on, I continued designing and evaluating microfinance programs, but I kept returning to a fundamental question: Why do we start with microloans (i.e., microdebt) and not savings? Wouldn’t the security of savings be better than the stress of repaying a loan? Poor borrowers, I could see, often used their high-interest microfinance debt for consumption and emergencies instead of investing in profitable businesses that could pay their loans’ interest. These borrowers struggled to repay.
I saw that debt often equals stress.Then, in 2000, I heard Marcia Odell, then the director of Pact’s Women’s Empowerment Program in Nepal, give a speech at Brandeis University. It forever changed my understanding of microfinance. I learned that savings-led microfinance was not only possible but was already being implemented in Nepal. The Women’s Empowerment Program (WEP) worked through savings and lending groups, whose members mobilized their own savings and made loans to one another. I traveled to Nepal three times to document the model, which led me to evaluate similar initiatives in India and Zimbabwe over the next two years. These programs, even though they were developed independently and were not aware of each other, were organized on the same principles—the groups saved to build a loan fund, loans were made from the growing fund as members needed them, and the groups distributed the profits from lending to the members. There was no link to a financial institution or any injection of outside capital into the group fund.
Understanding how these programs worked became an obsession of mine. These savings-led initiatives had remarkable success, reaching poor villagers, most of them women, at low cost and on a large scale, with the profits from loans paid to the group members. Savings groups start with savings—building assets rather than debt. Trained groups of community members, not financial institutions, manage transactions.