Savings Groups and Financial Capability
A recent post posed the following question - Are groups themselves engines of (financial) literacy or do they need more education? Here is my response:
From my observations of savings groups in Central America and Kenya, I am quite confident that participation in savings groups promotes financial capability, the practical objective of any financial literacy program. Regular meetings keep financial management at the front of members’ minds, leading them to think critically about their fiscal behaviors. Members support one another to save more and to access loans when there’s an investment opportunity or need, and to share financial advice. Because this happens organically, the groups create a de facto tailored financial education program, with no additional funding necessary.
Improving daily financial management. First the obvious, savings groups keep members’ focused on opportunities to save. This is universal. Members in diverse groups and settings from Guatemala to Kenya are quick to list the small sacrifices they have made to increase their savings: walking to save bus fare, bringing snacks from home, buying bulk and reducing unnecessary purchases. And members across the globe list similar benefits to accessing loans and their accumulated savings at shareout, using the funds to grow their businesses, pay school fees, improve their homes and cover emergency expenses.
Critically analyzing financial tools. Participation in savings groups also helps members to reevaluate their use of other financial services and products. In one community in Kenya where microcredit penetration is quite high, and many savings group members were formerly in credit groups, savings group members encourage one another to leave MFI credit groups and rely instead on savings group credit, keeping the profits within the community. In some villages, MFI presence has declined dramatically and the field agents are confident that savings groups will overtake MFIs within the next few years.
Diversifying savings products. While skepticism towards MFI microcredit is pervasive among group members, many have diversified their savings strategy since joining the group, combining group savings with formal bank accounts. In Kenya, one woman opened a youth savings account for her granddaughter following share-out. She explained that while the bank account offers a lower return, it provides a more secure form of insurance in case something happens to her. In one village in Honduras within walking distance to a local credit union, some members funneled their accumulated savings into a credit union savings account after share-out. They explained that while they appreciated the regular deposits and access to loans in the savings group, they perceived the credit union as more secure for long-term savings. At the time I visited this particular group, the members were planning to open a group account to secure unlent savings in their second year.
While these examples are anecdotal, my hunch is that they are fairly representative. Where alternative savings and credit products are available, accessible (with a reasonable fee structure and low minimum deposit), and secure, savvy savings group members will diversify their savings and compare credit terms, abandoning credit schemes that are higher cost or less convenient. Where they are not, members will frequently look for ways to maximize the financial benefits of the group by increasing their savings, taking loans when necessary, and trading business tips with other members. Thus, over time, group members optimize their financial management in a way that can surely be recognized as increased financial capability.
The above observations are from the Catholic Relief Services Agriculture for Basic Needs project in Central America and SILC Innovations in Kenya.
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Reader Comments (1)
Hey Suzanne,
Thanks! I completely agree with you - it seems so obvious that people learn how to manage money by managing money. And I suspect one learns more from doing that than one does from a formalized (and expensive) activity called financial literacy training - although I'm sure the latter reinforces the former. Of course, our groups are not the only way that people learn to manage money. Portfolios of the Poor showed that some people are masters at juggling many different accounts - and that when their decisions seem irrational, that's often because we don't understand what motivated them. Anyway, great post.
Tue, November 29, 2011 | Paul Rippey