Let's Look Before We Leap

I recently was asked to read a draft of an academic paper on the pitfalls of microcredit and the virtues of savings groups. The paper tidily summed up the false assumptions of microcredit, all in hindsight of course, which included: poor people use loans to build their businesses; poor people are entrepreneurial; credit is the key ingredient to micro-business growth. And so on.

Then, the paper pivoted abruptly to highlight the merits of savings groups, comparing them to RoSCAs, SHGs and microcredit. The prose reminded me of the self-congratulatory hype that characterized decades of microcredit. While 6-7 well documented randomized control trials on SGs show the positive effects of living in a village with a few savings groups operating, we have no systematic studies on whether:

• SGs are better than RoSCAs (from a household impact or efficiency standpoint, or both).
• SGs are better than SHGs (for example, many SHGs in India are promoted in part by the Government of India. Less-than-stellar results may tell us more about the Indian Government than about SHGs.)
• SGs are better than credit-based MFI groups (from a household impact perspective).

There is a lot we don’t know and should find out before we continue plugging SGs as superior to other kinds of groups or to credit-led programs.

In a paper, Let’s Look Before We Leap, co-written with Elke Jahns-Harms, we examined a few assumptions that shape the SG industry. Much of the debunking was inspired by Elke’s fieldwork in El Salvador. She found that while the industry was praising SGs for the model’s focus on annual share-outs, those share-outs did not tie to seasonal needs of groups, at least not in certain communities in El Salvador. In another paper I worked on with colleagues from Bankable Frontier Associates, we explored the idea that SGs offer members a relatively brief borrowing window, which rendered them somewhat ineffective in meeting seasonal or longer term needs. We also explosed the zero sum game of group membership, acknowledging that we don’t really know who walks away a winner or loser at the end of a cycle.

The point of “Let’s Look Before We Leap” is not to diminish the giant strides taken by promoters of savings groups but to thoroughly question our assumptions so that years from now we don’t share the chagrin of the microcredit industry. We hope you like it and will add any assumptions we may have missed.