Profitability in High Income Groups

I have been involved in forming savings groups mostly in rural and urban low-income communities with a handful of groups at the office level in the Dominican Republic. While many community groups found the loans useful and actively sought them, I noticed that groups with regular and higher incomes showed little interest in loans. Rodrigo de Reyes, a colleague of mine from Colombia who belongs to a savings group recently established in his office, asked me following questions:

“Jong, our savings group has had two meetings and made one loan of $300 (USD). But we still have $250 and will have another $250 or $300 added in upcoming meeting. How can I increase the profitability of my savings group? If members take few loans, what other means are there to generate income?”

I directed his question to experts and ideas poured in: Paul Rippey said that it is OK if the group just saves (his group in Portland made its first loan of $200 in their 7th meeting), it is up to them; and initial messages of facilitators matter a lot in determining groups’ interest on credit. He added that some groups make it a rule to borrow at least once during the cycle to help overcome fear of borrowing. Jeffrey Ashe said that sometimes it takes a long time for members to start borrowing. In some groups in El Salvador, for instance, it took up to 3 years to loan out most of their savings. Franz Gómez said that people at the office often have steady incomes and they do not need to take loans. He was cautious with the idea to borrow for borrowing’s sake if one is not going to put it into use.

That said, there are some cases that shed light on the profitability issue in high income groups. Alberto Sánchez, a member of my savings group is almost the only one out of 9 who seeks loans on a regular basis. With the loans from savings groups, he has already paid off his two bank loans and is planning to switch more bank loans into group loans. He takes loans for purely investment purposes: he buys property. According to him, the loan from savings groups is the cheapest one you can ever get, because although its interest rate looks higher than bank loans (we charge 1% per month, 12% per year, whereas the bank charges 9% per year), if you consider the benefit that you will gain at the end of the cycle, it is far cheaper. Besides, bank loans come with longer terms, so more money to pay. Since we do not place any limit in the loan size in order to stimulate borrowing, Alberto can access large sums, now up to $5,000, and is determined to take advantage of it.

Paul and Rodrigo are interested in encouraging members to take loans to pay down credit card debt, for which the groups should have a substantial amount of savings. Both have testimonies from members of their own savings groups around this issue: “There’s not enough money in the group to take a loan to pay off my credit card bill, so why take a loan now”. Looks like as the savings reach bigger sums, there will be more interest in loans.

We are turning this question to you, readers. We are sure that many of you are members of savings groups in your respective offices. What do you do to improve profitability of your group? What do people do with the loans? As savings groups are increasingly reaching the North, we believe this is a timely question we can think about.

Reader Comments (4)

As long as we have been involved with Savings Groups, I have always viewed it as a vehicle to bring poor people up from 0 to 1; a hand up out of poverty. Borrowing is an integral part of it to generate additional funds. So what is the purpose of high-income savings groups? Certainly the 0 to 1 idea has no bearing here. If you have no need to borrow money, why join a group so you can pay out interest to borrow money you don't need in the first place? It would be more efficient, effective and logical to just give that money directly to charity! That's how I see it.

Sun, August 18, 2013 | Tom Arsenault

Hey Tom. Thanks for that good question. Possible responses:

- people don't need loans, they need lump sums. And people join the groups for the commitment savings - group support in saving even when it's difficult - that enables them to amass remarkable sums by the end of the cycle.

- And, just being in a group is transformative, and members often report that they see things differently - they are more confident, and have more ideas, and more moral support realizing those ideas.

- Finally, having money in savings and access to credit can free up funds that are sleeping elsewhere - under a mattress, or in non-performing assets. That is, people are willing to use some cushions they have established here and there, if they know they have the cushion of the group.

But - that's me. Jong, Rodrigo, everyone - what do you think about Tom's question?

Sun, August 18, 2013 | Paul Rippey

Thanks Tom for the interesting question!

I still remember a speech given by a member of a Toastmaster club in Poland. He was an IT specialist running his own company, but had to go through some financial difficulties due to the lack of a simple financial knowledge. He was lamenting that nobody had taught him how to manage money at school and insisted that financial education should be given at school. Savings group teach us a basic money management skills and the "active act of savings" can be useful for many high income people since not all are good at it.

Also, as a person who forms savings groups, I found it highly beneficial to be in the group by myself. I was able to understand better what the group think, feel and behave in a certain way. So far I had borrowed twice to cover emergencies, which made me appreciate savings group all the more.

Mon, August 19, 2013 | Jong-Hyon Shin

Hey all! I have beein in a savings group for only three months. I have noticed that even if the savings group is formed by people who are not poor and have steady income, most people are disciplined with their savings. They save the same amount every time, very few people save less than the last time. We have already lent twice in our savings group. The last loan was to cover an emergency and our colleague will pays us by next meeting (so not the best profit for the group, but an excellent service to our collegue who would've otherwise paid twice the interest at a bank).

Tue, August 20, 2013 | Rodrigo de Reyes Lanfranco

(Originally published in August 2013)