Saving Money and Developing Enterprise Activities: A Virtuous Circle.
In a country in which over 70% of the population would be unable to survive a personal economic downturn lasting more than three months, according to Visa’s financial literacy barometer for 2012, South Africa’s poorest are leading the way. Recent research conducted in rural areas in KwaZulu-Natal and the Eastern Cape has decisively challenged the perception that poor people do not save or that they do not need financial services because of limited incomes.
A research study funded by FinMark Trust focused on the activities of savings and credit groups led by Pietermaritzburg-based NGO SaveAct. The research showed that accessing savings and credit, as well as bigger lump-sumps in the form of share-outs, can drastically improve the livelihoods of poor people and increase their likelihood of diversifying their income sources by engaging in enterprise activities. In particular, the study found that several are the ways in which savings group membership can support enterprise development.
Indirectly, having regular access to a safe place to save and take loans allows members to smooth their household consumption, thus supporting their irregular and small sources of income. Having access to cheaper credit changes the financial behaviour of members who are now no longer reliant on ‘loan sharks’ in case of emergencies. This leads to a better household and financial stability which represents an ideal platform for diversification of investment and engagement in more risky activities, such as the starting of an enterprise.
Directly, the research found the following main pathways in which being a member of a savings group can support enterprise development:
- Members are able to access funds, in the form of loans and share out, to start and support their enterprise activities, which they may not otherwise have had. Most members reported that being able to access credit enabled them to buy inputs and stock that they needed to start a new activity or support an existing one. The greater level of financial stability and the knowledge shared within the group were also mentioned as helpful factors in the development of enterprise activities.
- There exists a ‘virtuous circle’ of savings and small enterprises that shows that, while small enterprise activities are supported by funds from savings groups, the profits generated through enterprise are reinvested into savings, thus providing funds for further enterprise development. As one of the Community Based Promoters (CBPs) put it: “Members would borrow money to improve their businesses and they know that they can borrow money from the group if anything in their business is lacking…it is a two-way process because [when] I have sold things, I take the profit and save it to the saving scheme”.
- Membership enables investment both into household assets, thus increasing household stability, and into enterprise activities. Also, savings group members tend to increase their level of investment in terms of savings over time. In particular, as members become familiar with the methodology, see the returns on their money and their trust in the model grows, as well their involvement in enterprise increases, they tend to buy more shares and also join multiple groups.
- Social capital is being built alongside financial capital. Savings group membership helps individuals increase their ability to manage their finances and gives them a new sense of confidence. Members share a sense of ownership of the programme and build trust and mutual support within communities. Also, through savings groups members share ideas and challenges, both in terms of enterprise activities or financial management and more broadly. They work together and start collective initiatives.