Questioning the Cash Out


I’m a bit bemused by the short-term finite aspect of the savings group model I’ve been reading about here.  Perhaps it’s a feature only of the tontine/ROSCA style groups of Africa — or maybe I’ve simply got the wrong end of the stick — but I don’t understand why any savings-based activity would include self-destruction as a fundamental principle.  It seems like building a house, only to demolish it after a year of residence. You still have the materials, but not a home.

Coming from a classic credit union background, where members’ savings are the only source of funds for the loan pool, I’m used to thinking in terms of creating a savings opportunity that will last in perpetuity — or at least as long as there are people who wish to utilise it on terms that ensure its business survival.  In other words I take an enterprise approach, in which the savings opportunity is embedded in a ‘bigger picture’ of collaboration, provision of loans, and a sensitivity to the community context within which it’s taking place — all with an eye to familiar key performance indicators (portfolio quality, profitability, capital adequacy).

Even if such an enterprise and balance sheet orientation isn’t entirely appropriate for a small rural savings group, surely the principle of savings functionality still applies?  In the limited life model, is it assumed that after a year the saving member suddenly loses the need for the savings opportunity represented by the group?  Doesn’t this imply a transient nature to the value of having savings? 

I understand that group members can start a new group on distribution day, but doing so only emphasises the stop-start nature of the process.  Even in a nomadic lifestyle, where homes are dismantled and rebuilt in a seasonal cycle, the need for a financial asset is constant.  Or do savings groups not perceive themselves as facilitating the creation of an asset by its members — merely the short-term access to a loan?

Many years ago, the wife of a shoe-shop owner in a small town became active in their community credit union and developed the view that her savings were not a temporary accumulation of cash just waiting to be spent.  She decided her savings would serve her better if she treated them as a tool, to be used repeatedly rather than as a single-use disposable.  By using her savings to secure her credit union loans, she gained the maximum possible utility from them, converting them from merely a means of exchange to a useful asset.  This became the basis for a national roll-out of a linked savings-loan concept that is still in use today.

 If savings group members were to adopt the same long-life repeated use of their savings, it would introduce a whole new level of sustainability to their group, with benefits for members, groups, families, and communities.  Let’s think about the enterprising savings group!


Reader Comments (4) 

Very good post. The previous post "tea with money" deals with groups in Afghanistan that don't cash out for years. In two papers on this blog under resources (Pray for Money; Village Financial Systems in Northeast India) members belonged to several groups with varying cash-out times. Some lasted more than ten years.

Mon, April 11, 2011 | Kim Wilson

There are two reasons why time-limitation is a fundamental principle of informal finance. First -- value. In the memorable phrase of Stuart Rutherford, a cash-out date puts in the hands of members a 'usably large sum of money' that it would be virtually impossible to save at home. Second -- risk. The longer money piles up, the greater the risk of 'elite capture' -- a broad term that can mean anything from a village rice miller or a petty government bureaucrat using their authority to borrow a large sum, and not repay it; to traditional 'borrower domination' as documented by WOCCU in credit unions in Latin America.

When you use the analogy of demolishing a home after living in it for a year, you may also be underestimating (quite a lot, in my view) the meaning of a time-limited institution. Once the technology of forming and operating the institution has been learned by the villagers, you've 'built the house'. Making people to move out every year may seem onerous, but in an authoritarian setting where it is virtually impossible to remove bad leaders, it's their one chance to roll the dice again and see if a better hand comes up. They don't call this an 'action audit' for nothing.

Tue, April 12, 2011 | Brett Matthews

Thanks everyone. 

The first time I heard about savings groups was from Bill Grant. I was loving everything he said until he got to the annual distribution. Huh? I asked. Why would they do that? 

It was the most counter-intuitive thing I'd ever heard, but the reasons are just what Brett says: people want their lump sums, and the distribution keeps things clean. It's not for nothing that it's often called the "action audit". 

And, the second year is not just a re-run of the first year. I often describe it by saying it's not like dropping out of school, it's like starting a new grade in school. Some people come and go, there is new management, the rules change slightly, and you do a lot of the same things but at a higher level. Savings are usually substantially more the second year, as is the sophistication of the members, and the demand for credit.

But Greg is right, that SGs are not a good vehicle for long term saving. I saw women's groups in Pakistan where many of the members have a parallel bank account to save for their infants' college education (!). But, they still go to their savings group meetings regularly.

Tue, April 12, 2011 | Paul

There is an old saying that applies here (can't remember who said it, so forgive me whoever for my lack of attributing it). It goes "For every job, there is a correct tool". The VSL model is the correct tool for fulfilling needs for lump sums of cash in the short term. It is elegantly simple, is anti-bureaucratic, and so can be run by ordinary people using their substantial common sense. No need for levels of management and a hierarchy outside of the group itself. 

And because it is simple and non-hierarchical, it is also agile. The system can be adapted for a particular group's needs during a specific, time bound cycle. And so, just like you wouldn't use a screwdriver to do a hammer's job, then you wouldn't use VSL (or RoSCA, or ASCA) for long term investments of an indeterminate time. 

One other aspect I want to bring out is that, contrary to the 'building the house only to demolish it' analogy, the VSL groups do not typically disband and destroy their 'institution'. The cash may be gone but the MECHANISM lives on forever...if the group wants it to. The type of mechanism is every bit as effective for the type of job it is doing as a credit union is in doing it's job. It's just doing a different type of job. 

One thing we are considering doing for our members is to create a link for them to make long term investments in some of the instruments provided by the formal banking industry (we are in South Africa). We would prefer this option than that of trying to get our groups to create a long term saving function. And that brings me to the rest of the above "Rule of the Tool", which is "and for every tool, there is an artisan that knows how to use it'.

Wed, April 13, 2011 | Jill Thompson

Lending outside the group: Good business? or Robbing Peter to Pay Paul?

Tea with Money

Tea with Money