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. In fact, the performance of these groups has been so spectacular, that FinMark Trust (FMT) - an independent Southern African financial services research and policy advocacy group - recently commissioned research that has uncovered the far-reaching impact of these groups on people’s lives.
SaveAct’s model is derived from experiences and lessons in Africa. CARE International developed a savings model based on the traditional savings practices in Niger in the 1990s. Since then it has undergone refinements, while some adaptation is needed to local circumstances.
Why the focus on savings?
Much of the policy debate over assisting microenterprise in South Africa is centred on how to enable the poor to access credit. Many people believe that what the poor need is credit and they will ‘lift themselves out of poverty’. In contrast, the SaveAct model starts from the premise that what the poor need is a way of saving the money that they have. This would help them increase their assets before getting access to credit.
“It does not make sense for smallholders involved in a high risk venture like agriculture, to be building their enterprise on credit,” says Anton Krone, founder and director of SaveAct. “This requires that the poor take loans which move them immediately into debt, and they do this in circumstances that are unpredictable. If their crops fail or their enterprise experiences difficulties, they may never have the income to repay their loan. This can plunge a borrower into chronic poverty and worse. Building up savings before taking a loan carries much less risk. Savings help to build assets while dishonoured debt serves to deplete them.”
Despite high demand for saving amongst the poor, South Africa as a whole has a very low savings rate. According to SEEP, a leading international microfinance network, “Demand worldwide for reliable savings services is estimated to be five times greater than the demand for loans.” (2012). “The financial service markets are failing our society,” says Krone.
Where does the money for savings come from?
In recent years, social grants have injected money into rural communities on a scale previously unimaginable. Many households are dependent on social grants for their survival. However, these social grants are not optimally used and, without access to suitable financial services, a high proportion of recipients live in debt to loan sharks or mashonisas. Savings groups have offered many a safe and convenient place to channel part of their social grants into savings on a monthly basis. “People live without anything to cushion the shocks that life throws at them – and many do not recover,” explains Krone. “SaveAct offers training for groups to set themselves up, as well as financial education and enterprise training. Groups move quickly towards achieving consumption smoothing, which enables them to manage their cash flow to take care of peak expenditure and cope with shocks. They reduce their debt and make use of their increased capital from the savings group for investment in enterprise.”
Are the poor not too poor to save?
A common misconception is that the poor cannot afford to save. SaveAct’s programme shows that this is simply not true. The poor, more than any other segment of society, have to save in order to survive. And the demand for safe, accessible and low-cost places to save is high. Commercial financial institutions have promoted savings accounts in South Africa. More than one in three rural households have such accounts. Accessing them usually involves expensive travel, the interest received is low by comparison to the return on savings groups and – most important – they do not offer easy access to loans, as they do in savings groups. They are therefore not attractive to the very poor.
In 2008 SaveAct had trained about 600 members. By 2011 the figure had grown to 10 000. This year the numbers swelled to over 15 000. This growth is entirely demand-driven. “Our savings model mirrors the stokvel - which is a widespread indigenous, informal method of saving,” says Krone. “So participants readily identify with it. But we have removed much of the risk and lack of rigour that often characterises those groups. Thus members prefer the saving model to the stokvel because of the transparency of transaction and control that it brings to their money. Savings groups offer annual payouts with high returns at low risk. Loans are more readily available. As a result we are struggling to keep up with the demand for the training of new savings groups.”
“Savings group members in SaveAct groups are amongst the highest savers in Africa,” says Krone. “The figures speak for themselves: repayment rates on loans within the groups exceed 99%. Members earn an average of 30% interest on their investments and group membership retention rates are around 99%.”
How do the groups work?
Members ‘self-select' with whom they want to be in a group. Once they have completed the training and received the support offered by SaveAct they become self sufficient.
Members of savings group choose whom they want to be in a group with. That group is then introduced to rigorous and transparent systems and procedures. Members of the group save in shares on a monthly basis (e.g. R50 to R100 per share), allowing for flexibility in the amounts saved. They may borrow from their group according to agreed terms. Loans and a charged interest are repaid into the capital fund and in this way their shares earn interest which they use to increase their investment. Capital and returns are shared out annually in proportion to the number of shares bought. As groups mature they tend to schedule their share-outs to capitalise on economic opportunities such as buying agricultural inputs. Groups are by and large free of conflict and function effectively. This is because it is a transparent and simple system that members understand and have developed confidence in.
The groups are also proving highly sustainable. Almost without exception savings groups continue, once they have graduated from SaveAct’s training, into new cycles of self-sustained activity. They are supported by community-based promoters selected from established savings groups. These promoters mentor the groups to maturity while responding to demands from others in the community who want to form new groups. Their services are sustained through the payment of a small fee by group members.
The model can be scaled up and is relatively easily spread into even the most remote and underdeveloped parts of South Africa. “However this should not be seen as a substitute for the other important efforts needed to enable social and economic development in South Africa,” says Krone. “Our model adds value to other development efforts and does not run counter to them. However should these initiatives fail, communities will at least have their savings groups to assist them to cope and manage their lives that much better.”
“The model offers a low risk alternative. It is flexible, reliable, transparent, sustainable and self-managed. There is no evidence of exclusion and it is easy for less literate to understand and use. Most importantly it is scalable in a context where there are no suitable alternatives, and where the scars of apartheid, and more recently the effects of HIV/AIDS, are still so much in evidence.”, - Krone.
What are the effects of saving on people’s lives?
Research by Annie Barber (2011) shows that savings groups assist people living with AIDS to manage their household economy and in turn their illness better. FMT research further indicates that the savings groups provide support for members to develop more sustainable livelihoods.
Virtuous circles are continually being created, where pooled savings provide dependable capital, which gets invested into small enterprises. On average, more than one in every two rural households operates an enterprise. Profits are generally ploughed back into savings.
“Members borrow money to improve their businesses and they know that they can borrow money from the group if anything in their business is lacking”. It is a two way process because [when] I have sold things, I take the profit and save it to the saving scheme.” (community-based promoter, FMT research, 2012). Savings groups act as platforms to build social capital and reinforce community relationships and action. Members have re-discovered a sense of community and togetherness through saving and working together. A 37 year old female indicated, “We now care what happens to one another as members. If you see something that you think will benefit your neighbour then you tell them” while a 56 year old spaza shop owner summed up the benefits as “Interacting with other people, getting advice from SaveAct…lots of things, [like] learning from the elders and being able to ‘de-stress’ with other members.” “We witness people taking control over their money and their lives,” says Krone. “They gain hope and confidence in their ability to climb out of poverty. If there is no silver bullet to eradicate rural poverty, self-sustaining savings groups come about as close to it as one can get.”