Gumball Capital

Microfinance has certainly proved itself as a successful grassroots development tool. But Oxfam, through its Savings for Change initiative, has brought microfinance to a new level of community-centered development.

In a report released last February, Oxfam’s Jeffrey Ashe outlines the concept of savings-led microfinance programs, which sets up lending groups in community where members can not only receive loans, but also save their own income.

One of the underlying principles of savings-led microfinance is that not every person at the bottom of the pyramid needs a loan, but everyone needs a place to save their money. By setting up lending and saving groups, personal funds can actually be grown through the interest gained from the microloans, instead of losing value sitting at home. The saving and lending groups also provide the members with basic financial knowledge and expands social capital, similar to more traditional microfinance institutions.

The savings and lending groups are similar to the lending groups set up by traditional microfinance institutions. They have around 20 members–usually all women–that meet regularly to deposit funds or loan out money to entrepreneurs who need it. In the past three years, Oxfam has set up over 11,000 group with around 222,000 members in four countries-Cambodia, Mali, El Salvador and Senegal. With a recent grant from the Bill and Melinda Gates foundation, they will more than double those numbers in Cambodia and Mali.

Even with the success of traditional microfinance, most of its borrowers are located in Asian countries, and market penetration outside of those is only around 20%, with most of that penetration in urban areas. Oxfam–and others working on savings-led microfinance, like Pact’s Women’s Empowerment Program and CARE–are targeting the rural poor with their initiatives. Savings-led microfinance is low cost, (around $15 per member over three years), and group leaders are initially trained in creating other lending groups without the subsequent help of an NGO, so it can more easily scale and grow in a rural setting.

The limitations section in the report is brief, but the two problems mentioned are that the loans given out are usually smaller than needed, due to a smaller fund resource and that group participation takes up a lot of time. While reading the report, I also wondered about the logistics of the savings and where the funds are physically stored.

The Oxfam report makes a distinction between the sustainability of traditional microfinance and savings-led microfinance. It says that an MFI is considered sustainable when it makes a profit, but a “savings-led program is sustainable when the groups operate independently without staff support.” It also notes that traditional microfinance has not created any “transformative change”–the creation of larger business that let people completely move themselves out of poverty. It is too soon to know if savings-led microfinance will be a part of that transformative change, but it is exciting to see new developments at the bottom of the pyramid.