Building Economic Capacity With Savings ClubsThe U.S. economy depends on savings, yet when funding international development, donors prioritize giving money to the poor and measuring the effects. This method promotes accountability for programs, but it does not equip the beneficiaries to eventually be able to support themselves. The administrator at USAID, Mark Green, believes that ” the purpose of foreign assistance is to end the need for its existence.” This thinking has prompted a shift in microfinance from lending to helping the poor save. Local savings clubs effectively exert peer pressure on individuals to contribute their share to a group fund, which is used to provide members with loans or invest in their community.

An estimated 10 million people are involved in savings groups worldwide. By saving as a group, small sums of individual contributions add up which gives the the group significant lending power. These groups keep interest rates lower than formal banks and can help a member who is struggling to contribute rather than punish them. Many groups use funds to construct a school, clinic or well. This model allows locals to take charge of their own community’s development.

Judy, a mother of seven in Kenya, applied to Care International to become a promoter of their Group Savings & Loans programs. She understood the value of owning a business from opening a bookshop more than 20 years prior. Judy was selected to be trained as a franchisee in western Kenya. The franchise model offers benefits for both Care International and franchisees, and the model has rapidly expanded into rural communities. In 18 months, Judy has mobilized 7,552 people to join over 200 savings clubs. These groups manage a total of $193,705.

These clubs have become popular in many places including Vietnam, South Africa, Kenya, Nigeria, Ghana, Eritrea and Ethiopia. A major motivator for this type of money management is to save up for expensive cultural events. In South Africa, a funeral can cost a year’s worth of income, so four out of five people are members of savings groups focused on funding funerals. When a woman gets married in Bangladesh, a lavish celebration and dowry is expected, which requires the bride’s family to save a significant amount of money.

An assumption that many people make is that the poor cannot afford to save money. Actually, smart management of money is crucial when there is no room for error. In addition to the lack of money, the poor must provide for themselves with an unpredictable, inconsistent income. Savings clubs have proven to be an effective strategy for utilizing the power of community and money management to improve the financial situation of the poor.

Kristen Nixon

Photo: Flickr