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Can Digital Linkages Revitalize a Tried and True Savings Model?

In the world of financial inclusion, savings groups are among the most enduring solutions. These groups (tontines, tandas, chit funds and so on) are a staple in most financial portfolios of poor households.  In Sub-Saharan Africa, a fifth of adults use these groups to save, and they are an effective way to expand financial inclusion to rural, remote areas where banking and microfinance infrastructure traditionally cannot reach. While these efforts have provided informal financial solutions to poor households, savings group members remain outside the grasp of formal financial services. Digital financial services are disrupting many of the financial landscapes where savings groups operate. It may be time to reconsider how these groups operate and what future direction they take.

While savings groups are one of few financial options in remote, rural areas, they have serious limitations, including security concerns and finite saving durations. Further, as members become comfortable with saving and borrowing in groups, we have seen strong anecdotal evidence that their demands for financial services increase. In southern Tanzania, for example, one of the most remote regions of the country, savings groups formed by Aga Khan Foundation are literally demanding to be linked to banks and other financial service providers.

Woman counting money.
Photo by Jay Bendixen

What would it take to link savings groups and digital financial services? A team at BFA investigated the potential tradeoffs and benefits which savings groups and potential private sector stakeholders might encounter on this journey.  Based on our research, we found three potentially disruptive benefits of digital linkages for providers and members:

  • A strong business case for banks;
  • An opportunity to leverage data to extend individual financial services responsibly;
  • A need for creative partnerships among providers with complementary value-adds.

The business case: In countries where cost of capital is high and funds are scarce, savings groups offer a viable opportunity to aggregate cheaper funds. Savings groups, which typically consist of 20-25 members each, aggregate funds in group accounts, resulting in much higher balances than typical low-balance individual accounts. Our analysis found that, by offering groups and their members a savings account where they can pool their funds – instead of in a lock box, for instance, banks can earn six-fold the monthly profit of a typical individual low-balance account (see related Focus Note on the business case for private sector providers). And given the consistent savings patterns of groups, these higher balances would generate steady, predictable float. At the same time, savings group members would benefit from secure, long-term savings options which savings groups do not provide in their current form.

Data and individual financial products: Savings groups amass a treasure trove of rich data—all of which is currently stored in paper ledgers, making it prohibitively expensive to collect and analyze. If, instead, members conducted their group transactions using mobile money, this transaction data would be captured digitally as well. A number of companies have begun working with mobile, financial and other data to develop risk scores which financial providers can use to extend appropriate services to new clients (First Access, Entrepreneurial Finance Lab, and even Safaricom in partnership with Commercial Bank of Africa with its m-Shwari product). For low-income individuals, such scoring offers a viable means to demonstrate credit-worthiness—a possibility which might otherwise be off limits without a prior relationship to a bank. Further, banks and mobile providers could use this data to develop new, tailored products to a new customer segment. 

Shaking up roles in the savings group value chain: Lastly, bringing savings groups—sustainably and responsibly—into the formal financial sector may create a rethink of stakeholder roles. Thus far the role of group promotion and training has been played exclusively by nonprofit organizations and supported exclusively with donor funding. However, digitization could automate some of the most difficult aspects of savings groups which need training, such as calculating share-out amounts at the end of a cycle. Potential efficiencies from digitization could lead to an entire re-think of the process of training and promotion, bringing down the cost to form sustainable groups.  And with the lower cost of group formation, we may then begin to see private players in the value chain – banks, MNOs or agent aggregators – willing to invest in creating groups as a viable revenue-generating strategy. It may be that digitization unlocks a cost-effective means of customer acquisition into the digital ecosystem.

Savings groups have persisted for good reason. Very little can compete with the convenience of what is all but doorstep banking. But digital financial services could be the “very little” which could make big strides in taking savings groups to the next level by bridging the short-term, emergency informal financial services offered by these groups with secure, long-term formal options offered to them. In so doing, group members will have access to expanded financial options, both to mitigate the myriad risks they face but also to save for their countless future aspirations.

Comments

25 October 2014 Submitted by Jeffrey Ashe (not verified)

Another way to improve on a tried and true savings model is savings groups with total membership 10 million, 9 million in Africa, likely twice that if viral replication is counted. Savings groups build on ROSCAS by improving transparency (better record keeping, officers, bylaws) and permitting variable savings and variable loan sizes as the value of the loan fund increases with interest income. When the fund is divided members when need is greatest in the villages members often see a 20% to 50% return on their savings. As one woman said, "Why pay them when we can pay ourselves. " See intheirownhands.com Jeff Ashe [email protected]

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