Please Shut Your Marketing Mouth

This is a plea for us all to shut our marketing mouth for a while when we are talking about Savings Groups. You know the mouth I mean - the one that says how unqualifiedly wonderful SGs are, and talks about the amazing impact they are having on people’s lives. That marketing mouth. Thanks.

Look, I think Savings Groups are great - I love the excitement and feeling of empowerment, the convenience and the commitment savings, and the mutual support which helps members make it through difficult days. But - duh - Savings Groups are far from perfect. Visit ten SGs at random - truly at random - and you will find five with issues and possibly one or two with serious problems.

But I don’t hear much discussion of the issues and problems. The bad news is filtered out, and the marketing mouth only says good things.

More and more I think that SGs are at a phase when they need harsh critics. As Larry Reed said at the March 2013 SG conference in Washington DC, “I also encourage you to be as open about your challenges and failures as you are about your successes. I know that this is hard when you’re trying to promote a movement, but you will gain much more credibility if outsiders can see you taking on your challenges in the light of day.”

In particular, the following claims sometimes made for Savings Groups are at best unproven, and in most cases, I think, false. 

First: Savings groups reach the poorest of the poor. Maybe they can do, but studies have shown that they mostly reach the middle class of the poor. That’s not bad, and it won’t cost us anything to tell the truth. Maybe some SG projects reach the poorest of the poor - good for them! They get bragging rights. But most of us don’t.

Second: Groups offer members a very high return on savings. We frequently hear about the high return on savings - someone saves one hundred and at the end of the year, they get 130, or 160, or even 200 back. Wow! Are SGs making money out of nothing? No they aren’t. In the best case, they are zero-sum mechanisms. The only money that comes back to members is money that they paid in themselves, and they willingly agree to pay high interest rates - often 10% per month - to borrow their own money because they know that builds the saving fund for the end of the year. Some groups even have rules that all members have to take loans whether they want them or not, or that the “box has to be empty between meetings”.

Third: After training, groups are self-managing. We once thought that we could train SGs for a year and then let them go. In fact, many of them need help indefinitely for years, or forever. They need help calculating share-out, resolving conflicts, with loan recovery, and with elections. That’s not a bad thing - we all need help with things occasionally. I’m just sayin’ that groups are not as self-managing as we think. 

Fourth: Groups are a safe place to save.  In fact, the best groups are a reasonably safe place to save, but many members have lost some of their money through theft and default and mismanagement. You roll the dice when you save in a Savings Group. Lots of members prefer the odds in their SG to the certainty of paying fees and transport costs if they save in a bank, or with mobile money - and neither banks nor cell phones offer commitment savings. So groups are a good place to save - so we don’t need to exaggerate their safety. 

Fifth: SGs alleviate poverty. Wouldn’t it be nice if they did alleviate poverty? But there is no credible evidence that they do so. Happily, there IS evidence that they reduce the suffering of poverty, by helping people get through difficult times - what is called consumption smoothing. Let’s limit ourselves to the claims that there is evidence for.

Reader Comments (3)

Paul,

I see some of the critique you may be looking for in the research reviews undertaken by the Evidence for Policy and Practice Information and Coordinating Centre in the Social Science Research Unit of the Institute of Education, University of London (phew!).

"A study of microfinance in Sub-Saharan Africa found that micro-credit and micro-savings make some people poorer and not richer. Clients save more, but also spend more. Health generally increases and, for some, access to food and nutrition. Impacts on education are varied, with limited evidence for positive effects and considerable evidence that micro-credit may be doing harm, reducing the education of clients’ children. Micro-credit may empower some women, whilst both micro-credit and micro-savings improve clients’ housing. There is little available evidence about the impact on job creation or social cohesion. Clients’ failure to increase their income, determined by external factors as well as how they spend their money, can lead clients into further debt, unable to invest in savings and reliant on further cycles of credit. Successful increases in income, repayment of loans and the accumulation of financial wealth are all feasible, but the analysis shows how these are not always achieved. Micro-credit and micro-savings are doing harm, as well as good, to the lives of the poor whom they purport to serve. Cautious implementation and further rigourous evaluation are required if these interventions are to alleviate rather than deepen poverty."

http://eppi.ioe.ac.uk/cms/Default.aspx?tabid=3207

Sat, November 23, 2013 | Greg Pirie

Truly agree with the fact that SGs are not perfect and do have lot of weakness. It is not fair enough not to highlight them and look for ways to reduce them. In the other hand, focussing on these weakness could lead to misunderstanding that lead to failure, donors could be hesitant to fund unsuccessful interventions and development actors could also think that this is not the good thing to do as it fails. But failure and weakness are part of learning process and if well managed constitute a key step for improvement. Any development interventions, especially in poor countries need strong follow up and capacity building component to sustain, this is the same for SGs.

Wed, December 18, 2013 | Fatouma Zara

Paul,

Nice summary of the issues. It is true that in Mali the groups were visited a lot more than advertised although we did reach the poorest (but not in Cambodia or Central America). In all the countries where I have worked a lot more join savings groups than are part of ROSCAS. All the evidence I have seen is that savings smooth income and they use their payouts instead of borrowing at high interest so that makes them a bit better off.

This is what I posted this morning on a 100 Million Ideas piece on why MF is reaching fewer of the poor. First the posting then my comment:

See below:

Jeff

#tbt: Top 10 Reasons That Fewer Loans Are Going to the Poorest
GALLERYPosted on May 21, 2015 by The Microcredit Summit Campaign
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1. Myopic focus — For many years, the indicators used to measure microfinance performance have focused on numbers of clients and the sustainability or profitability of the institutions that reach them. These indicators tell us little about whether we are achieving the real aim of microfinance — helping people lift themselves out of poverty. Without tools to measure our ultimate ends, we satisfy ourselves by measuring our means instead.

LEA EN ESPAÑOL *** LISEZ EN FRANÇAIS
We are pleased to bring you this #ThursdayThrowback blog post, which was originally published in Vulnerability: The State of the Microcredit Summit Campaign Report, 2013. For two years in a row, we have reported a decrease in the total number of extreme poor (those living on less than $1.25 a day) that had received a loan. Our “Top 10 Reasons” chapter in the 2013 Report are still very relevant.

What has caused a reduction in microfinance clients worldwide? And why have all of those reductions been from the poorest clients? Here are our top 10 reasons.

coverSOCR2013_EN_138x178
Read the the entire report

10. Andhra Pradesh crisis in India — Our reports show that India accounts for almost all of the reduction in clients worldwide. Most of these reductions come from Andhra Pradesh, where fast growth led to overlending, cases of harsh collection practices, and heavy regulation from the state government. Many MFIs and banks stopped lending to microfinance clients and self-help groups as a result.

9. Maturing markets — Some of the fastest growing markets in the world, including Bangladesh and parts of Latin America, have reached a point where a large proportion of the people most easily reached have become clients, and MFIs’ growth is slowing as they seek ways to lower costs and reach more remote and more difficult markets.

8. Global economic crisis — Microentrepreneurs and the financial institutions that serve them could not remain insulated from the worldwide economic crisis. Less economic activity in the developed world meant less tax revenue and greater focus on domestic spending by Western governments. It also led to a drop in donations to international charities. Remittance flows dwindled, which negatively affected economic activities in towns and villages dependent on income from family members in other countries.

7. Investor wariness — Banks and other investors in India and other countries curtailed their investments in microfinance, while international microfinance investment vehicles continued to invest almost three-quarters of their funds in Eastern Europe and Latin America, regions with less outreach to the poorest.[1]

Villager in Nangolkot, Noakhali, Bangladesh
Photo credit: Shamimur Rahman and Giorgia Bonaga

6. Donor fatigue — Many bilateral donors have reacted to growing commercialization and negative press by reducing their support for microfinance. This means less funding is coming in for groups that may need subsidies to build sustainable programs to reach poorer and more remote clients.

5. Herd mentality — MFIs find it easier to operate in locations where other MFIs have already developed the market. Investors find it easier to invest in MFIs where other investors have already done the due diligence. The result is a piling-on effect that eventually leads to bad debts and a retreat from the microfinance market.

4. Patchy information — Global reporting on microfinance activity (including our own in this report) shows data by country. This disguises the fact that, within a country, some locations may have more than enough microfinance services available while others have very little. Without accurate and timely maps that localize activity, it can be hard to see which markets are overheating until it is too late.

3. Better measurement — In the past few years, many MFIs have more widely adapted poverty measurement tools, such as the Progress out of Poverty Index®, Poverty Assessment Tool, and the Food Security Survey. The MFIs that employ these tools often find that the number of the poorest that they are serving is less than they originally estimated. This means that some of the reduction in numbers of the poorest being served reported to us is due to more accurate reporting on the number of poorest clients.

2. Misaligned incentives — he market provides few rewards to those MFIs that reach poorer and more remote clients because reaching these clients usually entails higher costs and smaller margins. Without ways of recognizing those that reach the poorest, MFIs will have few incentives to extend to this market and will find it difficult to attract funding to do so.

1. Myopic focus — For many years, the indicators used to measure microfinance performance have focused on numbers of clients and the sustainability or profitability of the institutions that reach them. These indicators tell us little about whether we are achieving the real aim of microfinance — helping people lift themselves out of poverty. Without tools to measure our ultimate ends, we satisfy ourselves by measuring our means instead.

Jeff Ashe on May 21, 2015 at 10:15 am said:

All very true and very well stated. Except for densely populated Bangladesh, there is little evidence that microfinance can reach more than 20% of the population. When it aggressively goes downmarket to extend outreach the poorest get into debt they often cannot repay as the MFIs that made the loans harass them. So let’s focus lending on those whose businesses could actually move ahead with a loan and for the rest encourage savings. Since financial institutions cannot profitably manage tiny savings accounts (most who have savings accounts don’t use them anyway) let’s go to where the action is, saving and borrowing in small groups. The 20,000 Saving for Change groups with 450,000 women members annually track 24 million transactions with not a single staff person (or silicon chip) involved. That’s why it would require a full time staff of 1,500 for an MFI to manage this program where all this was accomplished with a staff of 200 for three years who have since (hopefully) gone onto other jobs.

Anyway the latest Finscope clearly shows that most of the saving (and borrowing) action is informal. We should visualize financial inclusion through institutions and mobile money as one half of the puzzle while putting some resources into the other half of the puzzle – the informal and semi formal ways that the poorest take banking into their own hands. Why not catalyze the capacity of the poor to solve their own problems.

Back in the USA I learning that in immigrant communities a vast invisible ROSCA system is thriving as the formal banking system has turned its back on them. A no interest payout from a ROSCA to buy a functioning used car – looks pretty good compared to a PayDay loan. see http://www.intheirownhands.com.

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Thu, May 21, 2015 | Jeff Ashe

Note: This article was originally published in November of 2013, however the date was changed to move it up higher on our feed, because we really think it's worth a read.