Credit & Savings Groups Throughout the World
The ability to save is a skill that even non-vulnerable populations struggle with, as saving requires discipline since it means withholding something for future use instead of consuming it right away. In developing countries, individuals form savings & credit groups in order to support each other on the way to meet their financial aspirations, as well as have a safety net to fall back on in times of uncertainty. While saving can be challenging, being surrounded by people with the same goal can help to stay focused & motivated. In order to reach specific financial goals, all group members work together to attain that goal by saving bite-sized amounts. By using peer pressure individuals develop discipline & self-constraint, as they can not access their funds until the end of each saving cycle. By working together, group members build mutual accountability and mutual support, which makes group saving not only cohesive but effective too.
By definition, savings and credit groups are composed of 15–30 self-selected individuals who meet regularly and frequently in order to save and borrow together; amounts are based on each member’s ability. Groups then pool the savings to make loans on which they charge a relatively high interest rate which in return increases the value of the collective fund. At the end of the saving cycle ( generally between 9–12 months), the entire fund with interest earned is distributed among the members according to the amount each has saved in the group. After each annual share-out, groups immediately begin another cycle of saving and borrowing.
While throughout the world various iterations of the Savings Groups have been introduced, the model remains highly heterogeneous. Each savings group defines its own policies as well as governing structures and procedures. Each group determines its share price, interest rate, repayment terms, loan priorities, and social contribution. A system of fines is also established, for individuals who violate group policies. Members’ savings and loan transactions are usually recorded in the record-keeping books or sometimes in a central ledger.
These savings schemes are often known as informal as there is no institutional authority to govern the process. It is especially common for women in developing countries to join these groups, so they can save and borrow money with a group of people that they know and trust. Individuals usually use their loans for basic needs such as food, shelter or education, but it is also widely used for business development to generate a stable income in the future.
While most of the credit groups have the same foundation, some of them differ depending on the countries they are being held in.
In Uganda most savers and lenders are farmers, however, many credit groups are depending on the interests, population and location. Groups also vary in size and are usually composed of both male and female participants. Two types of rural credit schemes are most popular in Uganda. The first type involves members of the same village coming together and making a monthly rotational contribution. Each month the entire contribution is attributed to a single member of the group. This process goes on until the first person’s turn to receive the monthly contribution appears again. Usually, when the rotating cycle ends, members start the process again. Inhabitants of Uganda reported that this is the most common form of credit scheme since it does not involve the calculation of interest rate at the end of each month. Approximately half of all credit and saving groups in Uganda operate this way. The second most popular type of credit scheme is where members come together for purposes of pulling their financial resources to create a fund where members can save and borrow at a specified interest rate. This interest rate is usually 10 percent per month for members and 20 percent for non-members while contribution to the savings and credit scheme is monthly.
In South Africa, credit and saving groups are called stokvels. The name “stokvel” originated from the term “stock fairs”, as the rotating cattle auctions of English settlers in the Eastern Cape during the early 19th century. It is estimated that 11.6 million people participate in these saving schemes. Stokvels are invitation-only groups of twelve or more people, where members contribute fixed amounts of money to a central fund on a weekly, fortnightly or monthly basis. Stokvels generally have a constitution that dictates the size of the contributions, when the accumulated money is to be paid out and the roles and responsibilities of the members. Each month a different member receives the money in the fund, which was collected during that period. Depending on the type of stokvels, the members can use the collected fund for their own use, for payment or investment purposes.
Also in South Africa, the disadvantaged, poorer and less educated classes, often formed burial societies. Burial Societies provide “informal insurance” to help families with the costs of a funeral. This is similar to a stokvel in the way that monthly fees are collected. However, the main difference is that periodical payouts are not made and new members can only benefit from the saving scheme after a three-month waiting period.
Susu as it is popularly called across West Africa is a community-oriented savings system. The principle is the same, each member of the group makes a standard contribution to a common pot once per some specific period. Then each period the total contributions are attributed to a single member of the group. The recipient changes each period in a rotating fashion such that all the members of the group are eventually recipients. Participants of Susu do not make a profit but receive their contributions as a lump sum. The sense of community is very important in Susus, as it establishes trust between the participants and since it is generally oriented at solving a shared problem among a community.
Africa might be the continent with the most credit groups worldwide. For instance, in Egypt, since 2009, 2616 credit groups have been formed. Those benefit 54,011 of the poorest and most marginalised individuals. Moreover, Sudanese can be members of khatas, the indigenous practice of pooled savings used as microfinance funds managed by women for women who are amongst the poorest in the region.
Latin America & the Caribbean
In Latin America and the Caribbean (LAC), there is a long-standing tradition of informal, decentralized, community savings and credit mechanisms, which are usually known as tandas. This economic activity is popular in various countries of Latin America known under different names, including cundinas in Mexico, juntas in Peru, cuchubales in El Salvador and Guatemala, pollas in Chile and pandeiros in Brazil. An English name for such an association is a partner hand. In short, a tanda is a form of a short-term no-interest loan among a group of friends and family.
Tandas in Guatemala typically follow the same type of model, members meet every 15 days to provide their contribution, which can vary between $2.5 to $25. Through a transparent and very rigorous process, the group’s administrator collects cash contributions from each member and records them methodically in individual accounting books. Three women elected by the group record and guard the savings following a strict differentiation of tasks under the group’s careful social audit. Based on individual capital, members can access loans of around $100, which they must repay in 2 or 3 months at 5% interest.
In Latin America, savings clubs carry the name of Cajas Comunes, these clubs are formed with the purpose to accumulate a certain amount of savings. Typically, members share a common goal and a savings horizon. The rationale behind organizing a savings club often involves accumulating savings to cover extra expenses during the Christmas season. Another common practice involves forming savings groups in order to make joint purchases of supplies or other commodities. In Mexico, the Pequeño Mundo Solidario initiative promotes the creation of groups in marginalized communities in which each member makes a weekly savings contribution towards the purchase of bulk commodities. Savings clubs do not have a credit component and typically emerge within their local communities. The accumulated savings is kept by a group member, deposited at a financial institution or used towards joint purchases.
Last but not least, Asia. Half a billion people now live in informal settlements in Asian cities, and their numbers are increasing. In 2017, roughly 39 per cent of the adult population in low- and middle-income countries did not have a bank account, 55 per cent of which were in Asia. Therefore, community finance has always been one of the most important financial tools to address both individual and collective needs.
In Nepal and Sri Lanka, savings groups are managed entirely by women. In Sri Lanka, men are not allowed to join local groups, and the few who participate in Nepal may not make decisions. There are no gender restrictions in the Philippines, Cambodia or Thailand, but women significantly outnumber men.
In Cambodia, tong tin has existed for many years. The tong tin, borrowed from Italian “tontine”, is a rotating savings scheme created to help individuals who are short on money. Deposits, loans, and interest payments are made in cycles, usually once or twice a month. At each meeting, members of the tong tin give their contribution to the president and prepare secret bids for the amount of interest they are willing to pay in order to receive the loan. Each member writes their interest bid on a piece of paper, folds it up and gives it to the president. Whoever bids the highest for the month takes the pot, immediately paying the remaining members the interest they bid. Those who bid lower, collect only the interest payment. The winner is not allowed to borrow again until the tong tin has run its cycle. By the end of the full cycle, each member will have had a chance to bid on the pot, and everyone will be repaid in full, plus any interest they earned from previous bidders. If depositors put their faith in the wrong president, they could find themselves broke after he runs away with the deposits.
Arisans are commonly used in all communities across Indonesia. As in other countries, members of arisans contribute a fixed amount on a periodic basis. Group meetings are held at a time and location convenient for all members with the purpose to encourage members to socialize and bond with family, friends, and neighbours. At the end of the meeting, the collected amount is allocated to one member based on a lottery. In Indonesia, the administrators — an agent or a local institution — usually charge 5–10% of the collected amount. For more affluent Indonesians, arisan has evolved to be a social gathering rather than raising money to save. But for unbanked Indonesians, it can be the only way to get access to financing of any kind.
To conclude, savings groups have proven to be extremely popular and durable around the world. While about 1.7 billion adults globally remain unbanked — credit & savings groups help individuals to cope up with unexpected expenses, start household businesses, learn important income generation skills and create economic change that can ultimately impact entire communities. As a result, the livelihoods of community members have been transformed by the knowledge that they have the ability to call on savings or credit at any time in a manner that is flexible and appropriate to their situation and set in an administrative and social culture where they feel understood and valued.
As a next step, for the savings groups that have reached their full potential, it would be beneficial to get linked to the formal financial system. This would help people to increase their regular savings and receive the guarantee of security. As a result, additional financial resources could be used by households to meet consumption, investment and emergency needs.
Savings Groups: https://www.cgap.org/blog/savings-groups
Informal rural credit schemes and their impact on rural livelihoods in Kabarole district, Uganda: a network approach: https://dumas.ccsd.cnrs.fr/dumas-01262241/document
How South African stokvels manage their lending activities outside the courts: https://theconversation.com/how-south-african-stokvels-manage-their-lending-activities-outside-the-courts-135449
Susu has Saved Africans for Generations — and it’s not even a Formal Banking System: https://www.africanliberty.org/2018/12/04/susu-powers-the-african-economy/
Transforming Women’s Lives through Finance:
Women’s social and economic empowerment: https://care.org.eg/womens-social-and-economic-empowerment/: https://sudan.un.org/en/20161-transforming-womens-lives-through-finance
Lending Circles Help Latinas Pay Bills And Invest: https://www.npr.org/sections/codeswitch/2014/04/01/292580644/lending-circles-help-latinas-pay-bills-and-invest?t%3D1623333265010&sa=D&source=editors&ust=1628786926280381&usg=AOvVaw3a9ir2v0F-TG_DF7dtMiOs
Savings Groups in Latin America: https://mangotree.org/files/galleries/1468_Note_1__Savings_Groups_in_Latin_America_series_1.pdf
How savings groups are empowering women in Guatemala: https://www.ifad.org/en/web/latest/-/story/how-savings-groups-are-empowering-women-in-guatemala
Informal credit systems in Cambodia: https://www.proquest.com/docview/304965318/3C43A22DF82047D6PQ/1
Arisan and the rise of m-commerce in Indonesia: https://www.ericsson.com/en/blog/2014/9/arisan-and-the-rise-of-m-commerce-in-indonesia
Informal Financing of Small-Scale Enterprises in Sri Lanka: https://www.files.ethz.ch/isn/27905/2002-10.pdf
The Global Findex Database 2017: https://globalfindex.worldbank.org/basic-page-overview