FinMark Trust recently commissioned research that has uncovered the far-reaching impact of savings and credit groups on people’s lives. Over the past few years a local NGO called SaveAct, has been pioneering a quiet savings revolution in poor rural communities in South Africa. The model that they have used has enabled some 15 000 members of savings groups to reduce debt and improve economic resilience. The rural poor move to a situation where they can manage their own finances, save money, make loans to each other and earn extremely competitive interest rates to build their capital. All this is being achieved without the intervention of formal financial institutions and without loans from microfinance institutions.

A new wave of savings-led microfinance is sweeping through Africa and has found its way to South Africa. There are already over six million members in Africa actively working their way out of poverty by building up savings, and lending to each other. What does this new phenomenon mean for the banking sector?

Banks have tended to see lending as an autonomous activity that precedes savings. They have therefore been reluctant to lend to low-income rural households and enterprises, because both collateral and repayment ability have been seen to be lacking. Through its ‘savings first’ approach, SaveAct has shown that they are missing a great opportunity, on the one hand, to penetrate the substantially largely untapped rural loans market on a sustainable basis (through their own savings-led credit initiatives) and, on the other, to help develop the rural economy (which will lead to further profitable business for them in this market).

SaveAct uses a simple, transparent, readily replicable savings and credit model, in terms of which individual members may borrow up to 3x the amount that they have saved, generally at an interest rate of 10% per month. Since 2008, this approach has generated:

• 15 000 members in 650 groups
• a total savings book of about R15 million
• an average loans book of about R10 million
• an average return on savings for members of more than 30% p.a.
• default and membership attrition rates of less than 1%.

Fed mainly by social grants, remittances and earnings from self-owned SMEs, this demonstrates the capacity of poor rural communities to save, mobilize capital and use that capital to borrow sustainably, when a medium that they understand and trust and that does not entail significant costs becomes available.

There are:

• 3-4 million rural households in South Africa, only 46% of which are ‘banked’ (almost all have savings/transaction accounts, very few loan accounts) (FinScope Consumer Survey 2011)
• 2-2,5 million rural SMEs, only 35% of which are banked (also mostly for savings/transaction accounts) (FinScope Small Business Survey 2010)
• 30% of rural households, 10% of rural SMEs who use both formal and informal financial services (FinScope Consumer Survey 2011 and FinScope Small Business Survey 2010)

Most SaveAct members who have bank accounts appear to use them mainly to receive social grants/remittances, withdrawing most of the funds for consumption or to save through SaveAct-initiated savings and credit groups (SCGs).

It can be inferred that the preference to save through SCGs follows from the easier access to credit relative to banks. Banks could and should be looking to retain a greater proportion of these ‘through-flow’ funds both to increase their own deposit-base for lending to clients at large and to use as collateral for lending to these specific clients. At the least, the record of inflow of funds could be used to establish the appropriateness of account-holders for unsecured credit and to market actively on that basis.

To retain a greater proportion of such funds, banks will need to compete favourably with SCGs in terms of cost (lending would have to be at much less than 10% per month), and in terms of the accessibility of loans.  But SCGs also have seasonally-related needs both for secure cash-holding services – for which group accounts could be opened – and for liquidity. Banks could readily provide both, but would need to approach augmenting liquidity with considerable caution as experience elsewhere in Africa has shown that adding too much leads to the collapse of savings-led creditworthiness. Individual members of SCGs would also benefit from greater access to formal sector transaction, savings, insurance and credit facilities (as well as air-time/other purchases) through mobile phones/other branchless banking channels.

More than 50% of SCG members are involved in their own SME income generating activities and more than 50% borrow from their SCGs to provide start-up or working capital for their SMEs. Part of the income derived returns to SCGs as savings, which in turn provides the basis for further borrowing and own SME-generated income. The SCGs are therefore laying a ‘virtuous circle’ foundation for income-generating rural development and thereby for the growth of demand for financial services in what is probably the most underserved segment of the market.

The success of the SCGs has led to a situation where SaveAct no longer needs to market the model. The demand to help set up more such groups currently exceeds SaveAct’s capacity to respond immediately. As a model-promoting (as opposed to a funds-handling) microfinance institution, SaveAct provides self-selecting groups (typically of 20-25 people, mostly women) with 12-18 months of training/operational support, after which they function largely independently. After ‘graduation’, technical support from SaveAct’s community-based promoters (CBPs) is paid for largely by SCGs themselves. The training and subsequent operational experience help increase financial literacy levels. SaveAct also provides basic business development training and a central management information system that monitors individual SCG and the overall movement’s performance. Savings group members are therefore banking clients in the making, with this model optimising intermediation opportunities for the formal financial sector.

SaveAct’s need for capitalization is therefore not for loan capital but mainly for working capital for training and performance monitoring. While banks’ interest in supporting the organization may initially be motivated mainly on corporate social investment grounds, commercial business motives should also be strong - and will grow stronger as the movement scales up and matures.

As SaveAct’s Director, Anton Krone, has remarked, ’if there is no silver bullet for rural development (and for rural financial market development as an integral part of this), then SCGs are about as close as one is going to get’. The opportunity for formal financial services providers should not be missed.

• 15 000 members in 650 groups
• a total savings book of about R15 million
• an average loans book of about R10 million
• an average return on savings for members of more than 30% p.a.
• default and membership attrition rates of less than 1%.

Fed mainly by social grants, remittances and earnings from self-owned SMEs, this demonstrates the capacity of poor rural communities to save, mobilize capital and use that capital to borrow sustainably, when a medium that they understand and trust and that does not entail significant costs becomes available. There are:

• 3-4 million rural households in South Africa, only 46% of which are ‘banked’ (almost all have savings/transaction accounts, very few loan accounts) (FinScope Consumer Survey 2011)
• 2-2,5 million rural SMEs, only 35% of which are banked (also mostly for savings/transaction accounts) (FinScope Small Business Survey 2010)
• 30% of rural households, 10% of rural SMEs who use both formal and informal financial services (FinScope Consumer Survey 2011 and FinScope Small Business Survey 2010)

Most SaveAct members who have bank accounts appear to use them mainly to receive social grants/remittances, withdrawing most of the funds for consumption or to save through SaveAct-initiated savings and credit groups (SCGs). It can be inferred that the preference to save through SCGs follows from the easier access to credit relative to banks. Banks could and should be looking to retain a greater proportion of these ‘through-flow’ funds both to increase their own deposit-base for lending to clients at large and to use as collateral for lending to these specific clients. At the least, the record of inflow of funds could be used to establish the appropriateness of account-holders for unsecured credit and to market actively on that basis. To retain a greater proportion of such funds, banks will need to compete favourably with SCGs in terms of cost (lending would have to be at much less than 10% per month), and in terms of the accessibility of loans.  But SCGs also have seasonally-related needs both for secure cash-holding services – for which group accounts could be opened – and for liquidity. Banks could readily provide both, but would need to approach augmenting liquidity with considerable caution as experience elsewhere in Africa has shown that adding too much leads to the collapse of savings-led creditworthiness. Individual members of SCGs would also benefit from greater access to formal sector transaction, savings, insurance and credit facilities (as well as air-time/other purchases) through mobile phones/other branchless banking channels. More than 50% of SCG members are involved in their own SME income generating activities and more than 50% borrow from their SCGs to provide start-up or working capital for their SMEs. Part of the income derived returns to SCGs as savings, which in turn provides the basis for further borrowing and own SME-generated income. The SCGs are therefore laying a ‘virtuous circle’ foundation for income-generating rural development and thereby for the growth of demand for financial services in what is probably the most underserved segment of the market. The success of the SCGs has led to a situation where SaveAct no longer needs to market the model.

The demand to help set up more such groups currently exceeds SaveAct’s capacity to respond immediately. As a model-promoting (as opposed to a funds-handling) microfinance institution, SaveAct provides self-selecting groups (typically of 20-25 people, mostly women) with 12-18 months of training/operational support, after which they function largely independently. After ‘graduation’, technical support from SaveAct’s community-based promoters (CBPs) is paid for largely by SCGs themselves. The training and subsequent operational experience help increase financial literacy levels. SaveAct also provides basic business development training and a central management information system that monitors individual SCG and the overall movement’s performance. Savings group members are therefore banking clients in the making, with this model optimising intermediation opportunities for the formal financial sector. SaveAct’s need for capitalization is therefore not for loan capital but mainly for working capital for training and performance monitoring. While banks’ interest in supporting the organization may initially be motivated mainly on corporate social investment grounds, commercial business motives should also be strong - and will grow stronger as the movement scales up and matures. As SaveAct’s Director, Anton Krone, has remarked, ’if there is no silver bullet for rural development (and for rural financial market development as an integral part of this), then SCGs are about as close as one is going to get’. The opportunity for formal financial services providers should not be missed.