Regulating Savings Groups: Only a Proportionate Approach Will Work

Savings groups, such as village savings and loan associations (VSLAs), play a vital role in providing small-scale savings and affordable loans to women. Typically, these groups are self-managed and self-governed, meaning that it’s the savings group’s own members that manage the finances, convene meetings, and help arbitrate disputes. Historically, they have remained outside formal financial sector regulation.

This grassroots approach has made savings groups an incredibly resilient tool – even in the most difficult, fragile, and conflict-affected environments. Some of the earliest VSLAs existed in parts of Mali that formal providers struggled to serve. Savings groups have also flourished in contexts like Haiti, Yemen, and northern Nigeria.    

Yet, the less formal nature of savings groups has drawn attention from policymakers and regulators in a wide range of countries. Some East African countries – Tanzania, Uganda, and Rwanda – have gone as far as mandating the registration of savings groups and, at times, imposing strict rules. For example, in Uganda, the regulator can take over management of a savings group or impose penalties for lack of registration. In Tanzania, failing to register is a legal offense, and the law prescribes a fine of a minimum of USD 400,000 or imprisonment. But regulating savings groups as if they were banks risks doing more harm than good; what’s needed is a proportionate, risk-based approach.

At a recent savings group conference in Uganda, organized by NGOs, an entire afternoon was devoted to how NGOs could better meet this emerging trend of savings group regulation and work towards building a supportive regulatory framework.  

A recent study by the Gates Foundation, drawing also on CGAP research, reveals that the regulation (or registration) of savings groups will not be right for every environment and that simple steps can be taken to ensure that the regulatory approach is proportionate to risk.  

Why regulate savings groups?  

Financial institutions are regulated for a diverse set of reasons – everything from large-scale, systemic risk, to protecting the most vulnerable customers. Regulators should first have a clear understanding of why – or why not – to bring savings groups under the purview of a regulator.  Not all regulatory objectives apply equally to savings groups in the same way they apply to more formal financial institutions. 

Less relevant reasons:  

• Financial stability and systemic risk. Savings groups typically represent an immaterial share in total assets of the financial sector, and so questions of stability and systemic risk are largely irrelevant.  
• Illicit activities, such as money laundering and terrorist financing (ML/TF). The traditional lockbox group is composed of up to 30 members, each contributing a small amount. As a result, ML/TF risk is similarly very low.  

More relevant reasons:

• Consumer protection. As with any savings product, there exists a risk of loss due to fraud or mismanagement. While little research exists to quantify consumer risk in savings groups, a few notable examples of fraud have drawn regulators’ attention, which often involve group leaders taking advantage of other group members.
• Facilitating linkages to larger financial institutions. Many savings group advocates are also exploring how groups can be connected to banks and microfinance institutions (MFIs), helping groups (or individual participants) to ladder into larger, more productive credit when they are ready. Some form of registration, coupled with group recognition as a legal entity, may help savings groups navigate these partnerships.  

Possible adjacencies:

• Tracking the size and impact of savings groups. Where registered formally, savings groups can also be tracked for social impact and their eligibility for support from government or donors. However, this should not be a leading reason to regulate savings groups – there exist other, lighter-touch ways to gain this data, such as through household surveys. 

Often – and especially in more fragile environments – regulating savings groups should probably not be a priority for authorities, especially given the many other issues they face in times of disruptive innovations in the financial sector.  

However, where authorities have determined a need for better oversight, they should follow a proportional approach.  

A proportionate approach for regulating savings groups

Where oversight is justified, regulation should reflect the low-risk profile of savings groups and avoid imposing burdens they cannot meet. In the previously mentioned study, we outline guidance for a proportionate approach to savings group regulation: 

• Registration over regulation. The key provisions of prudential regulation for a bank or deposit-taking MFI – geared toward measuring and managing systemic risk – largely do not apply to savings groups. Regulators should consider lighter-weight voluntary registration, aligning the scale of oversight with the complexity and risk profile of the institution.  
• Delegate and federate. Savings groups are small, numerous, and distributed geographically, often in the hardest-to-reach areas. Authorities should consider delegating registration to local authorities, local NGOs, or federations with indirect supervision by the regulatory authority. Such delegated structures can also play a role in supporting groups with reporting.
• Digitize records and harness the power of data. Several of the key benefits of savings group registration relate to visibility to the government, donors, and the private sector to help savings groups access external support and funding. It’s therefore recommended that this data be increasingly digital and easily accessible (with the right protections) to key stakeholders. Such benefits can incentivize groups to register, which is preferable to a mandate that is difficult to enforce. 

Registration of savings groups will not be right for every context. But where relevant, a proportionate regulatory approach is essential. The risks and needs of savings groups are simply not the same as microfinance institutions. However, a tailored and incentive-based approach can help create pathways to financial inclusion and empowerment—particularly for women, who represent 80% of their membership.