Featured Article: Rewriting the rulebook - Making SGs work better for their members
Rewriting the rulebook: Making SG work better for their members
Can savings groups help their members ride out shocks? Yes, a little. But they could be doing a lot better.
Fans say savings groups (SGs) provide a cushion when illness or disaster strikes - helping poor households smooth consumption while protecting assets and livelihoods. But is there evidence to support this claim? Though more studies are starting to emerge, particularly from parts of Africa and Asia, there is still a lot we don’t know about whether and how SGs help people deal with shocks, especially in regions where traditional and promoted savings groups are rare. The research described in the attached paper examines poor rural communities in El Salvador, Central America, through a combination of in-depth interviews, surveys and econometric analyses. The Savings Groups in this study are generally one to three years old.
What kinds of shocks do these households face? What strategies do households use to cope with these shocks? What is the role of SGs in those strategies? And crucially, are people in communities with SGs actually coping better than their counterparts without access to SGs?
Some Key Findings:
Net income vs cash flow
Findings confirm that the greater challenge for many households is not net income over the course of the year; it is managing cash flow so that shocks and short-term needs do not derail long-term well-being. Household financial management practices exacerbate this problem. For instance, most households sell maize at low prices during the harvest season to meet immediate needs, or buy it at high prices during the hungry season, when they are also most strapped for cash and vulnerable to shocks. (Notably, there was no difference in this behavior between people with and without access to SG.) Simply changing the timing of sales and purchases of maize could potentially signify a difference of a couple hundred dollars annually in reduced expenditures or increased income. This gives us an interesting and potentially more useful framework through which to consider financial needs and the role of SGs: rather than focusing on increasing income and assets, how can SGs help households manage cash flow to reduce vulnerability during lean times and take advantage of seasonal price fluctuations?
Informal loans were the most common coping strategy for all shocks; more than half of respondents borrowed, usually from friends and family (not from their savings groups!). 25 to 43% of respondents used personal savings (again, mostly not stored in their SGs), mobilized labor or sold liquid assets such as maize or chickens to cope with shocks.
Do SGs help households cope with shocks?
Savings Group participants self-reported that SGs help them manage and plan their household finances better, buy more or better-quality food, build a cushion for emergencies, and enjoy greater peace of mind. Participants also cited non-financial benefits, especially stronger friendships and greater solidarity. Does the statistical analysis bear this out? Somewhat. The econometric analysis provides modest support for the idea that the presence of SGs increases coping ability, mostly by facilitating access to savings and social support. When controlling for poverty, education, and other household and community-level factors, the presence of SGs in a community led to a 9.5% increase in the probability of successful coping. Put another way, introducing savings groups can reduce the proportion of households coping unsuccessfully in a community from 35.7% to 26.2%, a 26.5% reduction in households experiencing hunger.
… the groups could be helping more. Many of the group’s policy choices just don’t make sense for reducing vulnerability. For example, most members receive their payouts around harvest time, rather than during the hungry season or planting season when they are most likely to need money to buy food or ag inputs. Most members had no clear criteria for determining their payout dates, simply using dates suggested by a promoter or chosen to fit an aid agency’s funding cycle. (See my earlier post, “Timing is Everything”) [Note – in response to preliminary findings, many groups have since changed their payout dates.]
If they don’t get their savings when they most need them, what about loans? At the time of the study, fewer than a quarter of respondents in SGs had taken a loan from their group, and almost a third of the groups did not offer loans. Very few groups had an emergency (or “social”) fund. Given their (reasonable) fear of debt, it is good that members are not pressured to take loans or invest in risky income generation activities. However, if one of their key reasons for participating in an SG is “to have somewhere to go when something bad happens”, members may wish to reconsider their loan policies, particularly in case of emergencies. [Note – in the years since the study, more groups have added loans and emergency funds to their activities. Maturity of the groups is probably a factor – it takes time for groups to build the trust and accounting skills necessary for managing loans.]
Not being as effective as possible is one thing. More worrisome is that SGs actually increased vulnerability in some cases: hard-won savings were lost or stolen, or disagreements led to conflict between members, friends or family–a real problem when social ties are their biggest safety net. Poor accounting practices are ubiquitous and can contribute to disputes. The safety of the lockbox (and more importantly, its keeper) is a serious concern in this country with one of the highest homicide rates in the world.
Savings groups can help poor households cope with shocks. But they could be doing a lot better - and it wouldn’t take a massive overhaul, either. Simply adapting their own rules to better fit the needs of their members could make a big difference. But groups need to feel confident, competent, and empowered to rewrite their own rules to better meet their needs; otherwise, one inappropriate, externally imposed policy will simply be replaced with another. Promoters can help this process by facilitating conversations and asking questions about personal goals, cash flow needs, seasonal income and expenditure cycles, and then encouraging members to reconsider their rules in light of these goals and needs: When should we get our payouts? Should we save different amounts at different times of year? Should we give loans? If so, under what conditions? Should we maintain a separate emergency fund, and how would that operate?
Promoters can facilitate similar conversations around challenges the group has faced or can anticipate (stolen funds, disagreements over joint income generation activities, and so on), and then encourage members to brainstorm possible solutions and adjust policies accordingly.
One of the strengths of the SG model is its flexibility: groups presumably tailor policies to best meet their own needs. Is this really happening in practice? Or could SGs be a lot more helpful?
A note on research design:
As much as possible, we followed principles of Lean Research in this study. We tried to respect respondents’ time by trimming unessential questions and coming to their homes rather than asking them to meet with us elsewhere, which could require hours of walking or travel, plus standing around waiting their turn. We strove to have the interviews feel like enjoyable conversations rather than boring or intimidating interrogations, and encouraged respondents to continue working on their household tasks during our conversation if they wished. Indeed, some of our best interviews took place while respondents were weaving hammocks or washing laundry.
Photos are of participants in the study and taken with permission. Most are members of savings groups.