Savings of the poor: Boston Globe article

From the Boston Globe:
Q and A with Daryl Collins Financial secrets of the world's poorest people.

A new book, "Portfolios of the Poor: How the World's Poor Live on $2 A Day" takes a detailed look at the daily income and expenses of 285 families in South Africa, India, and Bangladesh, studying how they pay doctors when their children get sick, put food on the table when they're out of work, and pull together money for weddings, funerals, and holidays.

The Economist article in the preceding post cites this same book, a book I am eager to see.

Savings of the poor: Economist article

Even those with very little money have a sophisticated approach to finance

PAYING interest on your savings will strike most people as odd. Yet some poor people in the developing world do just that. In West Africa, for example, some people pay roving susu collectors a fee amounting to a -40% annual interest rate for looking after their deposits.

From The Economist print edition, May 14th 2009

(You may be asking why I would provide a hyperlink to the print edition … and that's a good question. As a disclaimer, the article is from the print edition, but the hyperlink will not deliver you that print edition, merely an electronic reproduction from that print edition. Too much explanation?)

MIT development economists

Esther Duflo and Abhijit Banerjee are two star development economists from MIT. While the merits of microfinance are highly hyped, these two prefer rigorous science, particularly randomized experiments, before placing so much hope on the hype. Not that there's anything wrong with microfinance, but development fads come and go, sometimes before we even know if they were effective. Practitioners try one thing and move on without testing and knowing – that may be a paraphrase from one of the two, so I'll just give you their actual comments on microfinance from a recent interview at Poverty Action Lab:

ED: Look at microfinance. There is no evaluation yet of the impact of a microfinance loan – we have the first preliminary results ever of the impact of a plain vanilla, group lending microfinance model. That's it. It is not as if there have been mixed results before now. The studies don't exist. And that is microfinance, where there are already a hundred economists studying it.

AB: So, if microfinance suddenly doesn't make all babies do calculus by the age of five, it is deemed a failure. I think if we just accept that in the end a few things work and somehow that gives people the spirit or the enthusiasm or the hope to act a bit more and enable those things to accumulate on their own.

Why Christian microfinance shouldn’t go away

Why should a nonprofit (or a Christian organization) use a business model like a bank instead of letting businesses do that? One of the trends in microfinance these days is big banks seeing the profitability of making big profits on small loans to the world's poor. Nonprofit microfinance institutions are in some places struggling to compete and stay in the market. Mexico is a great case study for big bank profits in an industry that has largely been nonprofit:

NY Times - Microfinance's Success Sets Off a Debate in Mexico

microLINKS - Mexican Microfinance: How Big Banks are Making Astronomical Profits

Why do nonprofits do microfinance? Easy. The world's poor are undercapitalized to grow their businesses and improve their welfare. Commercial banks do not make accessible loans to these poor entrepreneurs. Well, commercial banks used to not make those loans, but in some places they are beginning to see the profitability. There are a lot of poor consumers; it's a very big market. So now nonprofits are struggling to compete in some of these places where commercial banks are entering. The point is to bring in capital to stimulate the working economy of the world's poor, why does it matter if a nonprofit does it or a business does it? It still improves the lives of the poor.

Why should nonprofits compete to stay in the microfinance industry?

For one, and this is really my only one point, nonprofits can take risks that commercial banks cannot. Commercial banks enter and compete when the risks and rewards give them a green light, but when the light turns yellow, commercial banks turn back, when the light turns red, forget it. The poor are on their own. What happened to the banking industry that served poor business owners after civil war tore through Liberia? What happened to the banking industry that served poor business owners when a typhoon devastated Thailand?

It's a good thing that private sector industries bring services to the world's poor. But we cannot depend on the private sector when disaster happens. Nonprofit microfinance goes to the hard places, and it stays. If nonprofit institutions get competed out of the market, where will be the capacity when it is needed again?

What can I do for you?

The Prime Minister of Rwanda visited a small village near Kibungo. A true politician of the people, while visiting Kibungo the PM asked the people, sincerely:

"What can I do for you?"

Nothing, thank you. The group addressed by the PM was an active savings and credit association trained by our champions. They didn't need anything. Well, one thing … the group requested that the PM just keep police on the streets and they'd be happy.

This savings group was already doing for themselves. They are particularly disciplined in working each other's fields, they have saved consistently, and if one of them gets sick, there is another one assigned to take care of them. They are extremely well organized. This group works together so well and so diligently that they have earned themselves one full month of vacation each year! Do you take one full month of vacation? Nearby is the Akagera National Park and a beautiful lake with the President's vacation house (I am typing right now from across that very lake). I can clearly imagine group members taking a travel day to fish or lay out by the lake. They are meeting their own needs with time to spare, time to enjoy. They told the PM no thanks.

Teach a man to fish

Neal Baker introduced me to this modified saying:

Give a man a fish, he'll eat for a day. Teach a man to fish, he'll drink beer all day.

That's why it's better to teach a woman to fish, she'll feed her whole family.

In reality, our savings training teaches men and women to fish in terms of managing money and making it grow. We don't give out any fish, or money, but we teach to fish, or to manage money. Within the local church, our savings groups have also empowered men and women to become fishers of men and women. The church is drawing in community members who recognize the groups as more than pools of money. As a matter of fact, many community members might otherwise avoid a church scheme involving money/savings, but that's not what's happening, they are being drawn in because of how these groups are working.

Our groups' members are working in each other's fields, paying for each other's emergency needs, building houses and building relationships. That kind of success is visible, the fruits are good, the success inspiring.

It's hard to say that we just teach the very poor to save their own money, that we don't give them any food or money. But what we are teaching is how to manage their own resources. One day when we are gone, they will still be managing their own resources and making their money grow. Not only that, it's making their communities and families grow because it involves groups and it involves women.

Development theater

Bill Gates opened a jar of mosquitoes at a TED gathering and said, "Why should the poor be the only ones to get malaria?"

Foreign Policy: "misguided and somewhat tasteless attempt to make wealthy donors experience the realities of Third World poverty"

The World Economic Forum at Davos featured a "Refugee Run" so that millionaires can experience the horrors of fleeing violence and oppression.

Bill Easterly, NYU Economist: "Did the words 'insensitive,' 'dehumanizing,' or 'disrespectful' (not to mention 'ludicrous') ever come up in discussing the plans for 'Refugee Run'?"

It's difficult to respond to poverty and injustice. Give money, raise awareness … these are the approaches generally available to the concerned public. For those desperate for change, there is also desperation to tell the story in such a way to motivate much more money and much more awareness. I respect the need to do something that motivates change. When we know the pain in the world we must mourn it and strive to be peacemakers. But when our attempts become theatrical or consumerist, and the results are indeterminate, does our response respect the dignity of those who suffer?

Paycheck to paycheck

Part of spreading savings and credit associations is convincing beggars and widows and prostitutes and street youth to save amounts near $0.25 per week … Convincing subsistence farmers that they can subsist on a little less right now so that they can invest in better crops some four months later. It's hard sometimes to cast this vision to the very poor, that they can live with more purpose and greater insurance and brighter future by saving now. The very poor, however, are not the only ones who lack the vision to save.

Consider these numbers from Harper's Index, December 2008:

Percentage of Americans who say they live "paycheck to paycheck": 47

Percentage of those making over $100,000 per year who say this: 21

HOPE Haiti on YouTube

Microfinance From Below

The Fletcher School (a Tufts international affairs graduate program) is hosting a microfinance conference this March 26-28: Microfinance From Below: The Power of Savings & Savings Groups in Frontier Economies.

Here are a few conference papers related to savings and credit associations:

Start-Up Hiccups: Overcoming Challenges During the Formation of Savings Groups

From self-help groups to village financial institutions in Bali: How culture determines finance, and finance determines culture

Teacups and hand-hoes: Home-grown self-help groups in East Africa

New friends, new house

15 gathered together every week for 2 years. On Fridays, they rotated to each member's home to work on that farm. Sharing work on farms is a very common trend added onto these savings groups. And we know the efficiency of having more hands to share the work, not to mention the encouragement. After they work on that member's farm, each free laborer then pays the recipient of the labor with their weekly savings. Wow. We all work on your farm this Friday, and then we pay you our savings for the week.

They save a total of 1,100 RWF ($2.00 USD) per week, 1,000 rotates to the host farmer, and 100 goes into the accumulating fund. They make loans at 10%, and right now the group has a total of 40,000 RWF ($72.73 USD) on account and 24,000 ($43.64) out on loan. Marita uses her rotating lump sum to buy paraffin and soap, Susanne was able to purchase a phone. Francis took a 5,000 loan plus his own 2,000 and purchased a goat for 7,000 RWF ($12.73 USD). Ngendahayo has bigger plans.

Ngendahayo is quite a young man who seemingly spends much time on the farm by himself. Before this savings group, he was isolated. Isolation is a common theme for many in poverty, but here is this young man, hard working, plenty of promise, and his future is soil and toil. His future is poor and alone. Recently, his future changed. Ngendahayo has joined a savings group where he thrives, and he says that he now feels free to meet others. In fact, he is just energized about life. With a supportive social network and 16,500 ($30.00) on loan for materials and nails, he is now building a house … and plans to marry soon.

Mothers Union

The 12 members of the Mothers Union in Butare meet on the 3rd Friday of each month. Each contributes 600 RWF ($1.09 USD) monthly; 500 rotates to one member each month, 100 accumulates on account. The group has a total savings of 12,000 RWF ($21.82 USD) and they make loans at 10% to group members.

An interesting addition to this Mothers Union group is their extra monthly activity. On that 3rd Friday after they pool their savings, they contribute some equal share of expenses for purchasing materials to make mats. With their mat materials, these mothers make as many mats as possible. For any mats made on that Friday and sold later, they contribute 100% of the sales into their accumulating savings account. That's a pretty crafty way that these mothers value their savings.

Mats sell for 1,500 RWF ($2.73 USD). I'll have to take some pictures and then you can place your orders.

Example of a farming/savings setup

Here's a quick example of a farming-based SCA.

The group meets weekly to farm and save. When they meet each week, they rotate to another member's farm to work together there. Each week, 100 RWF from each member goes to the one member whose farm they're all working on. Another 50 RWF goes into an accumulating account just for emergencies.

Once a month, the group gives another savings contribution of 750 RWF each into an accumulating account just for savings and loans. They currently have 26,000 RWF on account.

Farmers do not have the most consistent cash flow; a lot depends on weather, land, workers, and then sales. Monthly is better for regular saving. At the same time, weekly is better for small contributions towards seeds or manure fertilizer. The emergency fund is useful if someone gets robbed or maybe an animal dies or there's just no farm production and one family needs food.

Our groups are given much guidance on how to set up consistent, transparent, and understandable pay-ins and pay-outs, and also how to handle different group situations. Within that training, groups still have a wide variety of ways of making the savings group fit their lifestyles and needs.

Reactions to savings groups

As we collect stories about our savings groups, members and their purchases, we also collect reactions to our programs within their communities. Here is a sampling of reactions so far:

• Our training in record keeping and policy guidance has restored some of the trust and faith that were lacking in some traditional savings groups. Before people feared pooling their savings because some won't pay back loans, others leave the group early, and still others argue about pay-ins or pay-outs. The structure we give in training frees them to get the benefits of community saving and lending while also drawing people together in healthy relationships. It's all about the trust.
  
• Some churches report that their cell groups had no objective. They meet, pray, and go home. Groups thrive on having purpose, and we have heard that saving together and participating in their personal and community-level economic development has given groups vision. Moreover, many have said they are encouraged by hearing testimonies and principles like starting small and growing big, and they are realizing the importance this has in their lives. Giving vision is giving hope.
  
• One trainer said that our savings program has been different from all the other trainings he's been to. "Many go start something but don't go back to see what's happening at the grass roots level." The groups we visit really appreciate and feel encouraged that we go to see what they have done.
  
• As we assess programs, our group leaders and trainers in the field are realizing that they too can go assess their programs. They have commented on the benefits of sharing stories and discovering groups' challenges, and our monitoring and evaluation trips are becoming a model for trainers to monitor and evaluate the groups they have created. That's an exciting by-product for the health of our programs!
  
• Unfortunately, we have also learned that people have been burned before with savings and credit. Some MFIs (not us) have moved into the area, taken savings and given unsound loans, and then they have folded up shop and gone home without reimbursing people's money. Of course, SCAs are different in that we do not hold people's money, they do. Still, we deal with the repercussions of doubt left by unsound agencies in the past.
  
• Some (in one particular area) have been reluctant to join savings groups because they are active in trading business in town. The ones who find savings more attractive are women, mainly widows. This system of savings is somewhat new in this area, so the advantages are not readily apparent to everyone, even though those same traders may be able to make better purchases and better profits with improved access to informal credit and social networking.
  

Of hens and goats

Velerie belongs to a savings group in Kayenzi that meets every Tuesday. She puts in about $1 every week; $0.90 goes into the rotating amount that goes to one member per week, $0.10 goes into an accumulating savings account.

Before belonging to a savings group, Velerie probably never thought that she might be able to put away an extra $1 per week. She never would have thought that if she could put away $1 for 4 weeks in a row that she could buy a hen for $3.65. Now that she's saving in a group of others who support and encourage her, she sees a bigger picture. Velerie comes each week, puts in a dollar, and soon the ROSCA rotates to her and she receives a lump sum of $13.50!! Velerie buys two hens and is left with money to spare for household expenses, health insurance … I don't know, chicken feed? The ROSCA payout provides her with a large sum of money at once. Money that would have never been around if she just had a little bit each week that seeped away into other, smaller, pedestrian purchases. Now, she has two hens.

Velerie cares for her hens for months and sells eggs in the community. During this time, she has built up $5.50 in egg money. Velerie sells her two hens, adds in her egg money, and she's got another large sum of $12.80 – which just happens to be the going rate for goats.

Velerie now owns a goat. She's not counting her eggs before they hatch (awful metaphor choice – we've moved on to goats now), but she's hoping to sell baby goats when her goat gets old enough to give birth, if she could be so fortunate [her words]. In case you're wondering, the Rwandese aren't big on consuming goat milk or goat cheese, just the goat.

An interesting part of this story, looking at it from our point of view, is that Velerie could have bought a hen without the group if she just disciplined her saving over one month. Only within the group, however, was she able to see a bigger picture and receive a bigger lump sum of money than she would ever otherwise have to spend. The "before" Velerie would never have bought those hens, even if we think she could have. The "after" Velerie invested in hens, sold eggs, and then attained a goat. The "after" Velerie is in business.

For reference: Hens cost 2,000 RWF; egg sales totaled 3,000 RWF; goats 7,000 RWF; Velerie saved 600 RWF weekly.

Saving high schoolers

When I did graduate school at Georgia State, I also worked in the Office of Civic Engagement. During my time there I had the privilege of being an interim staff advisor to the Economic Empowerment Initiative (EEI), which was student led by my friend Terrance Rogers.

This group was fantastic. They trained students to be smart with their money: How to save and invest, wisely take out loans, and buy responsibly. Most students aren't learning these lessons elsewhere. They also have a Match Savings Program in partnership with Bank of America. If students continue membership in EEI, earn good grades, and save x amount of dollars, Bank of America will match their savings when they graduate (that's a loose description).

Rwanda doesn't have an EEI for students that I know of. What Rwanda does have is the Christ's Friends Anglican Student Association of Butare. These students go to high school for 3 months then break for 2 weeks. While they're off from school, they meet and save money. They are not exactly banking a lot of money being in high school, but the group puts together 100 RWF each and they have 40+ members, so the total every three months accumulates over 4,000 RWF ($7.27 USD). In total, though, they have now accumulated about 25,000 RWF ($45.45 USD).

Each student's individual share is still not very much money, but as a group they have mobilized $45 that they can make loans from. Where else can a high school student get a loan? Where else can a high school student save? More importantly, nowhere else are high schoolers learning how to save.

2 students have loans out right now. They take loans through their parents and repay them through their parents at 10%. They see their pastors saving, see their parents saving, and now these high schoolers are saving. They are practicing managing their money and making it grow. Where else is that happening among the very poor?

That's economic empowerment and a lot of initiative.

Pastors and savings groups

HOPE's savings and credit association (SCA) model in Rwanda partners through the local church. This provides a great institutional framework for training volunteers and mobilizing new savings groups. A danger to using the church, however, is that money is a root of all kinds of evil. Trustworthy reputation for a church (or for a microfinance institution) is vital.

So, for the savings programs to grow and be successful, we need pastors and ministry leaders to be excited and involved. For savings programs to not endanger reputations, we need pastors to keep out.

In Rwanda, the message has been clear throughout the trainings, don't handle your people's money. How have Rwandan pastors responded? Beautifully. They start their own groups.

In Kigali, Pastor Sam Mugisha has an SCA of 46 pastors, and pastors only. They are excited, involved, and they know the value of saving and how it works. In other dioceses, we have seen the same story again and again. Most pastors are in a group with other pastors, and they have passed the training on to their churches and communities. There are several good stories of the ways pastors use their own groups, and I know of one group of diocese employees that also includes the bishop (though he doesn't hold any leadership position within his group). Most pastors' groups have similar variations, but here is one example:

The 3rd Sunday of every month, 5 pastors from nearby parishes gather together in one of their parish churches, which rotates each month. A visiting pastor will preach that week. After service, the 5 gather and each save 3,000 RWF ($5.45 USD) of which 2,000 is given to the host parish pastor, and 1,000 is put into an accumulating account. Their accumulating account has grown to 30,000 ($54.55). The rotating fund typically goes to something for hosting like utensils, plates, cups … but sometimes the rotating fund goes to community projects in the parish, like new roofing for the church. When church members see visiting pastors use their own money to fix the roof, they feel it would be good to contribute, too. The pastors not only set a good example by their fellowship and savings, but also by their giving in the community. This particular group of pastors takes their monthly visits a step further toward helping the community, they dig coffee holes. 60 cm deep, 40 holes per pastor, they prepare fields for coffee plants that are purposed solely for the community to benefit.

In different pastors' groups, the stories are similar. Often the pastors are empowered to care for community members better than they otherwise could. One pastor was robbed, and with an internal loan from his group he was able to restore his household quickly and pay it off slowly, and when students came by for help with school fees, he was prepared to help. Even after an emergency like being robbed, a pastor on a pastor's salary was able to restore his house and help students with extra money, too. That is a strong statement to the parish.

Emergency giving

A cell group in Shyogwe meets together each week representing 15 different families. Each agrees that the weekly contribution will be 200 RWF ($0.36 USD), which makes the group's total weekly contribution 3,000 RWF ($5.45 USD). After meeting for a short time, there was an incident that changed the way they saved. A single mother in their community became unemployed and had difficulty caring for her 3-year-old child. Economically empowered and mutually encouraged, the cell group intervened.

Each of the members agreed to contribute an immediate emergency fund of 20,000 RWF ($36.36 USD) per person, a total of 300,000 RWF ($545.45 USD). This is an impressive amount of capital. The purpose of this emergency offering: 50,000 RWF ($90.91 USD) per month for rent over the next 6 months.

They paid her rent for a half of a year in advance.

This cell group decided their policies needed to change. Now, the 15 members still contribute 200 weekly, but 150 goes into the accumulating ASCA account, and 50 goes into an emergency fund they can use to support their community. That's how they do economic development.

Ability to buy small things

When we gather stories about SCA group members benefiting from saving together, we always like to hear that they saved $0.10 per week and then started their own barber shop franchise. I was recently very pleased to learn that is exactly what one group has done, in effect. They have saved and bought hair clippers and then saved and bought more hair clippers and they are growing their business of cutting hair as a geographically dispersed group serving different areas.

Ok. But what about the lady who wants to buy soap. That's good, too.

A widow in Byumba says that she was "poor behind the others." She had no soap. But also, she had nothing to eat so she couldn't even think about soap, but she wanted that. Joining the savings group, she has now managed her finances so that her purchases work better for her; she can purchase using lump sums and she can also see her savings grow over time and with interest on others' repaid loans. She says she has something to eat now, and she can buy soap easily. She can buy soap easily. That means something. That changes your days, makes you happier.

When Danielle and I were in graduate school, both fulltime students, we were newly married with no money so we decided no purchases. We ate cabbage and rice and beans, drank water, studied on the weekend, and didn't spend money. We would have to have a discussion before going to the dollar store. Now, it wasn't so bad, we had budget to buy cokes when guests came, we rented movies sometimes; we weren't poor. But, we had decided not to spend extra-budgetary money without serious need.

One day, I had an opportunity for extra-budgetary income. I was asked to speak at a weekend college retreat that would pay some small amount. I told Danielle, "I am going to buy you shoes." She said, "No, husband, don't do that." I said, "No, I don't care, it's my money, it's extra money, I'm going to buy you shoes." Well, all of our money is really our money, but it won the argument. She had not had new shoes in a long time and the ones she loved were ripping at the seams. When I told her I would buy her new shoes, my dear wife cried.

Another widow in Byumba said that because of her savings group, she was able to buy shoes. My eyes watered up a little. That means something, to be able to buy shoes.

What can savings group members buy?

Many savings group members don't save much. Many don't have much. Marie-Jeanne was asking a group, "If you have 100 RWF, what can that buy in the market? 1/2 kg of salt is 150 RWF. If you eat a cup of sorghum porridge, that's 250 RWF, you do that twice per day and that's 500 RWF. So you can save if you just miss one cup of porridge each week."

What then? What can you buy when you save that you cannot otherwise?

First, there are two types of purchases, those made from ROSCA funds and those from ASCA funds. Most groups contribute either monthly or weekly into one of each kind of fund.

–

ROSCA is the rotating savings and credit association, so if my group of 10 each saves 100 per week, one week we meet I will receive the whole 1,000.

ROSCA spending is typically:

• school fees, books, and supplies
  
• agricultural purchases like seeds or manure
  
• small animals like hens, rabbits, and goats
  
• household items like soap or salt
  
• clothing, shoes
  
• medical insurance
  

A few people report that their ROSCA amounts helped them clear debts, like one family owed 10,000 RWF for their daughter's wedding and their ROSCA cleared the whole debt in one day. The groups tend to allocate the ROSCA distribution according to the timing of members' needs, but each member definitely gets a turn before the next rotation.

–

ASCA is the accumulating savings and credit association, so one meeting my group may put 500 into ROSCA, and may also put 100 into ASCA. The 100 accumulates until it is large enough to loan out at some group determined interest rate.

Some ASCA purchases have included:

• larger farm investments for seeds, labor, or land
  
• bicycles
  
• phones
  
• home rental and home building
  

Obviously there are varying amounts of what people can save, but there are also different degrees to which the savings and loans enable purchases that otherwise wouldn't have happened. Susanne was very proud to purchase and own a phone; that was a big purchase for her that may create new opportunities for her. In Shyogwe, we heard of a more elaborate use of an ASCA. One group member used a loan to purchase 216,000 RWF worth of musical instruments to donate to the church and for the use of the group. That's about $393 USD. A purchase like that means they already had some money and some purchasing confidence, but then again, they may have never felt capable of mobilizing that much money at one time and paying for it slowly.

Spreading out payments on what would otherwise be inaccessible purchases, that's what savings and credit can do for individuals.