The simple answer: Savings Groups plus access to a formal Financial Services Provider (FSP). Sometimes!
A soon-to-be-published report for World Renew documents my research on Savings Group linkages to FSPs. The key question is whether, when and how to link Savings Groups (such as the CARE Village Savings and Loan model) to formal providers like banks and MFIs.
The bottom line? With the right conditions, the extensive benefits of a Savings Group can be magnified and extended through linkage to an FSP.
Why Does Linkage So Often Fall Short?
Linkage has been tried before. A lot (the report describes a number of experiments). But with mixed success. Sometimes it doesn’t get off the ground, and at other times it provides not to be sustainable. Why?
From the FSP’s perspective
- It is hard for an FSP to make a profit through provision of financial services for even groups of poor people.
- It can be hard to get the right balance of technology. Technology is essential to cost efficiency. But the infrastructure and capabilities of rural communities have to match.
- Regulatory compliance an be excessively burdensome . Know Your Customer regulations, especially, can be very burdensome on both the FSP and the Savings Group members.
From the Savings Group’s perspective
- Some communities can find it hard to trust formal institutions, and sometimes this goes both ways.
- If a community is a long way from a branch, even depositing the group’s periodic savings can be challenging (and unsafe).
- The community benefits of savings groups (beyond the economic) can be eroded if regular meetings no longer seem necessary.
- A variety of cultural issues can get in the way of success. (These are described in some depth in the report).
What Makes Linkage Work?
There is no doubt that at times linking Savings Groups to FSPs has been successful. Success means that:
- the communities benefit economically (at least)
- the FSP sees profits from the linkage
- these are both sustainable in the long term.
Here are a few things that I have found to be common factors in successful linkages:
- The FSP honors and respects community Savings Groups as an asset both to their communities and to the financial system as a whole.
- Products and programs are designed specifically for Savings Group linkage. This includes adequate consideration of automation (to manage costs). Product features are those that groups and members actually need. Programs are delivered with high adoption
- Implementation of programs is facilitated with partners. This especially means global and local NGOs. It also includes Mobile Network Operators, insurance companies and government agencies.
- Linkage begins with savings. Groups are tempted to view linkage as a way to get bigger loans. But the partnership will work far better with extensions to savings capabilities for as much as two years before lending. FSPs like to start with lending too,
because profitability comes sooner that way. But this has not proven to be a sustainable model.
- Linkage should only take place when it is an extension to the purposes and core principles of the Savings Group. It will also only work with stable and mature groups. This allows taking advantage of a group's trust, financial education, and discipline.
I plan to publish more blogs over the coming months that will draw upon particular themes in the research. For example, the changing and growing impact of technology; approaches to FSP product design; and the NGO’s facilitating role.