Massive Elite Capture discovered in Savings Groups

Massive Elite Capture discovered in Savings Groups

Dr. Ferlandia Schmidt of the University of Halle-Wittenberg has recently published a study (Ihre Ersparnisse, meine besondere Notgroschen) - published in Zeitschrift fiktiven Forschung - with surprising, and for many of us disturbing, news about large scale “elite capture” occuring in savings groups around the world. This elite capture is concentrated, as are savings groups themselves, in Africa.

Definition of Elite Capture

According to Dr. Schmidt, elite capture occurs when resources are deflected from their intended purpose through opportunistic rent-seeking so that they benefit an elite. She defines an elite as “a group which both holds itself and is held by others to be superior by virtue of their power, ability or wealth”. Dr. Schmidt says that capture occurs when the management of resources is shifted from the group that was intended to manage the resouces, to an elite; this capture often “initially seems benign or even favourable to the group whose resources have been captured”.

Dr. Schmidt states that elite capture is typically marked by the existence of a justifying narrative, in which the elite capture is purported to be an historical inevitability and the unique solution to the needs of the individuals concerned. For instance, the justifying narrative will describe consolidation of resources in the hands of the elite as somehow constituting social progress, and the narrative will claim various benefits for the non-elites. At the same time, of course, the narrative will disguise the risks of the capture for the non-elites, and usually will omit any mention of the benefits to the elite.

Response of Development Agencies to Elite Capture

Dr. Schmidt notes that elite capture has long been recognized as a threat in community-based development programmes. She believes that this threat is exacerbated when development programs lead to the accumulation of sums of wealth that are significantly greater than what was historically available in the community, so that traditional wealth-leveling mechanisms break down.

The response of development programmes to the threat of elite capture have generally fallen into two strategies, sometimes referred to as counter elite and co-opt elite. In counter elite, mechanisms are designed to exclude the elite from decision making and from access to resources, so that goods steming from the development intervention become the exclusive property of the intended audience. In co-opt elite, the participation of the elite is solicited, but with clear boundaries so that they can play a positive role in safeguarding resources rather than capturing them.

Historical evidence has shown that co-opt elite approaches often break down soon after the end of whatever governance function has been provided by the development agency. However, the extent to which elite capture then occurs depends on the nature of the elite in question, and can be predicted with reasonable confidence by looking at three indicators. 

  • First, the elite’s track-record in managing other people’s goods. If they have misappropriated the goods of others in the past, it is unlikely that future outcomes will be any different.
  • Second, the degree of social accountability that the elites feel to the community in which they operate. If there is a large social (or physical) distance between the elites and the community, there will be little check on their behaviour.
  • Third, the strength of the justifying narrative. There must be a story which makes the elite capture seem both inevitable and beneficial to keep people from objecting to the shift in resources from non-elite to elite.

According to Dr. Schmidt, these three indicators provide little reason for optimism in the case of the massive elite capture of savings groups resources occuring today: the elites in question have a particularly bad track record of managing common goods; they have little or no accountability to the communities in which they operate; and they have produced a justifying narrative that is convincing to key allies of the non elites, including many of the international NGOs.

The Elites in the Case of Savings Groups

Dr. Schmidt says that in some isolated cases, local elites, made up of politicians, local religious leaders, or dominating or charismatic civic leaders, have managed to divert some of the collected savings of group members to their own use, by browbeating members, making pious appeals to contribute to the church, or misleading groups into thinking they have a civic obligation to pay dues or make a periodic contribution to the elite. However, Dr. Schmidt says that the isolated cases are minor in scale compared to the capture of substantial and growing amounts of savings by some of the large local and international banks which are playing an increasing role in both the credit and savings functions of savings groups in many African countries. 

Dr. Schmidt spends some time analysing the justifying narrative of the banks: “The bankers and their various partners have a justifying narrative labeled ‘financial inclusion’, which is presented as both an historical inevitability, and an unalloyed benefit to the non elite. Of course, as is typical in the case of justifying narratives, the elite do not mention that all banking interventions, even those launched in the name of corporate social responsibility, are profit maximizing”. She reminds us of the remarkable success of bank strategies in maximizing profits, mentioning as one germane example that in 2010, Barclays Bank announced it would pay more than £2 billion in bonuses, and that their latest CEO, Antony Jenkins, has a salary of £1.1m a year, before substantial bonuses. Dr. Schmidt continues that the justifying narrative fails to mention the risks to the non-elites, and cites, among many examples, Barclays tacit support of the former racist South African government, support which helped reduce the discomfort caused to the apartheid regime by international boycotts, and its much more current manipulation of the daily settings of the London Interbank Offered Rate, LIBOR, which had repercussions in credit rates around the world – a scheme through which millions of people lost a little, and the big banks made a lot, and for which Barclays were fined almost half a billion dollars.


Dr. Schmidt also notes that the social distance between the bank directors and almost anyone else is “nearly as great as that between the pharaohs and the people who actually built the pyramids”. Dr. Schmidt writes, “The directors of the large international banks must be considered the elite of the elite. Governments send out troops to protect them at Davos, and governments tax their citizens to bail out the banks when they make bad investments.”


Demystifying conclusion


Finally, in conclusion, Dr. Schmidt writes, “I do not exist. I am only a creation of Paul Rippey’s imagination, designed to fool people into reading a long polemic urging international NGOs to refrain from doing the marketing for large banks.” She continues, “Paul wants me to say here that this is an April Fool’s post, and that he apologizes that there is very little humor in it. He agrees that last year’s April Fool’s post was better, and he says he wrote this only because he sometimes wonders if he is the only person left alive who remembers the behaviour of the banks that led to the most recent financial crisis.” Finally, still speaking for Paul, Dr. Schmidt adds, “Yes, I use banks, and I hope that everyone who needs the services of a formal financial institution can have access to one, but the big banks have multi gazillion dollar marketing budgets. Using the trust and influence of INGOs to get savings groups hooked up with banks is a dodgy idea, and it’s weird that INGOs feel they have to do the banks’ work, and that they seem so remarkably unaware of the risks.”


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Reader Comments (6)

What a chilling observation. I only wish it were not true and existed only in the mind of Paul Rippey. But, it is true: See Nilford Vateman's paper, Conflict, Corruption, and Capture in African Savings Groups, Journal of Financial Development, 2012, Vol. IV.

Mon, April 1, 2013 | Kim Wilson

When my kids were 8 and 11 years old I opened savings accounts for them at New Bedford Institution for Savings with money they had been given for birthdays and earned doing chores around the house. Soon after it became Fleet Bank. A few months later when my kids were ready to deposit more funds they found their bank accounts were emptied. Fleet had imposed a $10 per month fee on savings accounts. My kids were crestfallen that all their money was gone. I was so angry I could spit. I talked to a teller at the bank and told her how low this was and that it sent a bad message to my kids. She said I should have read the fine print on notices they mailed my kids whne Fleet became the new owner. I said some bad words to her and left the bank. The old bait and switch! It's the same tactic used by Fleet's successor Bank of America and many others when they made sub-prime loans and then declared the mortgagees did not have the where-with-all to renegotiate the original usurious loans once they were in distress. Despite Paul's attempt at humor Kim is right that linking savings groups and banks can be a dangerous road to go down. I think most savings groups members would agree that if "financial inclusion" means being included in schemes to bilk SGs out of their hard earned savings, most would be happy to be excluded.

Mon, April 1, 2013 | Bill Maddocks

Paul, It may have been difficult to match the comedic genius of last year's April Fool's Day post; but this post provides a valuable and sobering message.

You refer to banks as "profit-maximizing institutions" and it continues to astound me that much of the financial inclusion literature describes savings groups in much the same way. Financial intermediation between savings groups and external structures is not a new idea and is often advocated on the basis of efficiency - to absorb excess liquidity or finance the unmet credit needs of groups. In fact, these efforts provide the justifying narrative that you refer to.

However, I have not encountered many savings groups that can be described as "profit-maximizing institutions". I don't think that many savings groups care whether they receive an annual return on savings of 35% instead of 30%.

On the other hand, your readers have - without a doubt - collectively observed thousands of groups that are supportive, protective community-based organizations. And members and their communities value - tremendously - the security provided by accessible, local resources that they control.

Over the last few years, the savings group movement has secured a home in the microfinance sector but it may in fact be better served under the umbrella of social protection initiatives. Savings groups may or may not have much to do with formal financial inclusion; but they are extremely supportive of community development and should perhaps be viewed primarily through this lens.

Tue, April 2, 2013 | David Panetta

Good one Paul! Sorry to tell you this, but I scrolled down to the end to read the punch line first.....

Wed, April 3, 2013 | Jill Thompson

Saving and lending groups are a factor which push people especially poor to be responsible in using gradually credits and doing small business which is a pull factor for sustainable development. When the members are in the meeting, it is a favorable moment to share on other issues in their day lives and local leaders can communicate through this channel.



Thanks. Of course I fell for it. I need to see what Kim cited Nilford Vateman - that name sounds familiar. I actually checked the site.

On a serious note - just returned from Guatemala and El Salvador. Found out that Compartamos has crossed the border from Mexico and is targeting the same Mayan women it does in Mexico. They are targeting Savings Groups - in this case the Saving for Change groups and trying to hire away our key staff with more pay and a bonus for every group they bring in. Most all the groups have turned them down. Wise of them.

Sounds eerily like Paul's account of the link of groups to MFIs for group loans.


Tue, April 23, 2013 | Jeffrey Ashe

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