| PROJECT EVALUATIONS – Different savings and credit approaches in the developing world could lead to guidelines for better practice. |
ECRC’s South African partner You and Your Money, took part in our international conference in London. General Director, Johann Magerman, is grateful to have attended the conference and says the experience proved to be a rich and rewarding one, as one was able to connect with people from diverse cultures and backgrounds. Johann will be one of several international partners of what has become a more international responsible credit movement concerned with the issues confronting us as a global community.
Below is an extract and link to a report focusing on savings and credit completed by one of You and Your Money’s funding partners, Fastenopfer. Fastenopfer is a Swiss Catholic organization that supports developmental work in countries from the South. This report covers three experiences: Peru, South Africa and India. The report shows how You and Your Money supported the savings group in Namaqualand - a particularly poor rural area in South Africa.
EVALUATION OF SAVINGS AND CREDIT APPROACHES IN FASTENOPFER PROGRAMMES
(by Caroline Schlaufer, Intercooperation, September 2008)
1. INTRODUCTION
In many developing countries the lack of access to financial services is an obstacle to
economic development. Therefore, the provision of demand-oriented financial services has in
recent years been used as an instrument for poverty alleviation. Fastenopfer (FO) also
promotes savings and credit components in numerous projects and programmes in Africa,
Asia and Latin America. In 2008, FO mandated Intercooperation with an external evaluation
of the different savings and credit approaches in the FO programmes. This report presents
the result of this evaluation. It is aimed at FO programme officers, FO consultants in the
countries and partner organisations.
1.1. OBJECTIVE OF THE EVALUATION
The evaluation aimed at analysing the current savings and credit approaches in the FO
programmes, and at preparing guidelines to implement savings and credit components in the
future. The evaluation intended to assist partner organisations in an exchange of experience
and in the identification of good practices, as well as in giving feedback to the visited FO
partners about their programmes. In addition, the proposal for an effective monitoring tool for
savings and credit components was elaborated.
1.2. METHODOLOGY
The evaluator visited three country programmes – India, Peru and South Africa. These
country programmes have all relevant savings and credit components, but each of them
follows a different approach. In Peru and South Africa the external evaluator was
accompanied by a local co-evaluator, who contributed to the respective country report. In the
visited countries semi-structured interviews were carried out with all relevant stakeholders
including members of the target group, project staff and partners.1 In preparation of each
visit, the evaluator studied project documents at hand and had a discussion with the
respective programme officers. Furthermore, before carrying out the external evaluation, the
evaluator visited the country programme in Madagascar to study its savings approach; this
experience is also included in the report, even though no specific country report was written.
In addition to the visits, a questionnaire on savings and credit components was sent to
different partners in all 16 FO priority countries, in order to get a full picture of all FO savings
and credit activities.
The first part of the report will deal with the function of savings and credit and different
existing models of working with financial services, taking into account the FO policies and
defined target group. Then FOs current approaches are analysed based on the
questionnaires and the country visits. In the last part guidelines are given towards a
consistent savings and credit approach, as well as a draft monitoring tool.
2. WORKING WITH SAVINGS AND CREDIT
Financial services – savings and credit, but also money transfer and insurance – can play an
effective role in development. In developing countries, big parts of the population, and in
particular its poorer strata, lack access to financial services. Savings and credit components
of development projects, credit unions and co-operatives, rural banks or microfinance
institutions therefore aim at providing access to financial services. On the other hand, poverty
is often a consequence of indebtedness and dependency. Awareness on the debt problem,
as well as the provision of secure savings and affordable credit in emergency situation can
assist people to get out of the debt trap.
2.1. THE FUNCTION OF SAVINGS AND CREDIT
SAVINGS
“Saving” means to put aside a part of the current income in order to use it later on. Savings
can be made in cash or kind – gold, jewelry, housing material, cereal, livestock, land etc.
Savings can be kept at home or in a group, deposited in a savings account or invested in the
house or the family business. Savings can have several functions:
* DECREASE VULNERABILITY
Firstly, savings serve as insurance. Savings can insure against bad times and emergencies
(bad harvest, illness, sudden unemployment). In addition, savings allow households to
smooth out their income over the year (e.g. what is saved after the harvest can be used
during the lean period).
* ACCUMULATE BIGGER SUMS
Big sums of money are sometimes needed in order to cover expenses related to life-cycle
needs (marriage, death, old age, future of children), to pay school fees of children, to invest
in housing, agriculture, small businesses or “visible” assets that increase status and
recognition in the community.
* OBTAIN OR REPAY A CREDIT
Many institutions or organisations ask clients to deposit a mandatory savings amount before
obtaining a credit. These savings then serve as guarantee for the loan.
CREDIT
“Credit” means to obtain resources that must be returned at a later date, in general with
additional payment (interest). The following functions of credit can be distinguished:
* MAKE INVESTMENTS
Through credit necessary capital can be made available for an investment in a small
business, in the family farm or in housing. Such investments in turn can increase agricultural
outputs and income or improve living conditions through better housing.
* OBTAIN WORKING CAPITAL FOR TRADE ACTIVITIES
Many low-income people buy a few goods and sell them at a higher price in order to
generate some income. Often, the capital to buy the goods is lacking, and traders thus
depend on credit to obtain some working capital.
* PROVIDE FOR BASIC NEEDS AND REACT TO EMERGENCIES
Sometimes, it becomes necessary to use credit to provide for basic needs such as food, to
pay for health care in an emergency or for the school expenses in the beginning of the
school year. If death occurs or a person in the family faces sudden unemployment,
consumption needs have to be provided for through loans. It is often in such emergency
situations when people get indebted at usurious interest rates and fall into dependency.
2.2. THE POOREST AS A TARGET GROUP
FO clearly defined the target group of its programmes as “the most disadvantaged parts of
the population”. This report will refer to this target group as “the poorest”. Several
considerations have to be made when savings and credit are used as instruments to work
with the poorest:
* SECURE SAVINGS ARE ESSENTIAL
Many believe that the poor are “too poor to save”. However, experience has shown that this
is not true. Indeed, poor people do save, but very small amounts. Savings are most essential
for the poorest, as savings can assist them to react to emergencies without indebting
themselves to moneylenders. Savings can thus be an instrument to reduce vulnerability and
consequent dependency. In fact, savings often serve the same purposes as credit, but credit
is riskier and usually more expensive.
* SMALL LOANS WITH FLEXIBLE REPAYMENTS CAN BE USEFUL
Small loans are useful to finance inputs to seize a promising income-generating opportunity
or to finance working capital for trade activities, in particular in urban settings. It is essential
that such loans can be rapidly accessed, and that repayments are flexible and adapted to the
cash flow of the borrower. Limits of such microcredit are reached if the target group does not
have the necessary economic potential to transform a small loan into a profitable investment.
In these cases, other instruments should be used.
* EFFECTIVE NON-FINANCIAL SERVICES ARE NEEDED
Non financial services such as training and capacity building or support in the fields of
agriculture, education or health are needed when working with the poorest communities.
Support in financial literacy, budgeting and administration can assist people in making good
use of a loan and prepare them to access financial services from microfinance institutions or
banks. Self-management of savings and lending schemes or rice banks can also have a
learning function. The management of a credit component and non-financial services should,
however, be handled separately (separate accounting, separate staff) in order to avoid
conflicts between a social mission when the enforcement of repayment becomes necessary.
2.3. MODELS FOR SAVINGS AND CREDIT
There are different ways of providing savings and credit to communities. Support of savings
and credit activities can be provided on different levels:
* at the target group level, e.g. through self-help groups
* at the level of a partner organisation/ institutions supporting the target group or providing
them with savings and credit
The following models of providing savings and credit are relevant to FO and currently
practiced by FO:
* SELF-MANAGED SAVINGS AND CREDIT FUNDS
Self-managed savings and credit funds are funds administered by self-help groups. They
usually consist of the groups’ own funds generated through savings (either in cash or kind).
These internal funds are in general used for loans to the group members. The internal
regulations for the activities within the group are determined by the members themselves.
Such an approach can contribute to strengthen the members’ capacities, which can lead to
empowerment. The formation, training and support of a group is often done by an NGO,
which in turn is supported by international donors.
When is this approach recommended?
The promotion of self-managed funds is in particular useful to support very poor target
groups in rural areas. But also in urban settings where people do not have access to financial
services such an approach makes sense. In many cases, however, the limited funds restrict
the capacity for lending, as the volume of such funds increases only slowly.
* MATCHING FUND
Matching funds are in general provided to the target group and transferred to their
ownership. Such funds “match” the groups’ own funds – e.g. for each amount saved an
external fund is added. Matching funds can thus serve as incentives to mobilise savings.
They can also increase the capital of the group by combining “hot” and “cold” money.3
A specific model using matching funds is the village bank model. A village bank or banco
communale is a self-managed savings and credit fund that mobilises savings for an internal
fund, which is then complemented by an external loan provided by the implementing
organisation. In this case the matching fund is a credit and has to be returned to the
organisation with interest.
When is this approach recommended?
Matching funds can be useful to additionally support self-managed funds, to strengthen selfhelp
capacities of the group and to provide an incentive for more involvement. However, they
need to be carefully set up in order to fulfil their objectives, i.e. the funds need clear rules,
good governance and a basic accounting system. It should also be pointed out that,
according to experience, externally funded approaches lead to lower repayment rates, since
the external incentive is often regarded as “cold” money and not managed as carefully as the
own funds.
* REVOLVING FUNDS
A revolving fund is a fund that is provided to the partner organisation for on-lending. The
revolving fund normally remains in the ownership of the donor and can be transferred into the
ownership of the partner organisations after a certain time and when certain conditions have
been fulfilled. The idea behind a revolving fund is that the fund will be maintained and grow
over the long term. However, such funds for on-lending can be problematic if they are not
managed professionally. Bad repayment rates or uncovered costs often lead to a
decapitalisation of the fund, and lack of transparency and inadequate accounting make
monitoring impossible.
When is this approach recommended?
Based on experience it is not recommended to provide funds for on-lending to non
specialised institutions or partner organisations.
* TRAINING AND CAPACITY BUILDING
An investment in training and capacity building is a useful supplement to all interventions in
savings and credit.
The following models of providing savings and credit are relevant to FO, but are currently not
practiced by FO:
* LINKAGE MODELS
The term “linkage” denotes the process of connecting groups to the banking system. The
linkage approach is a continuation of the support to a group-managed savings and credit
fund. It aims at putting informal groups in touch with the formal financial system in order to
facilitate access to credit. An NGO can promote linkage by assuming trainings and capacity
building tasks and introducing both parties to each other.
When is this approach recommended?
The linkage approach can only be used when formal financial institutions that are willing to
collaborate exist in the region. This approach has the advantage that financial services are
offered by professionals and that access to savings and credit is provided in a sustainable
manner, as it will not end with the termination of a project. However, the set up of a wellfunctioning
linkage is a complicated and long process.
* CREDIT LINES
A credit line is a loan to a financial institution/ partner organisation that will be used for
lending to the final borrower. Typically, an interest rate is defined that allows the institution to
cover its costs from the remaining interest rates margin.
When is this approach recommended?
FO does not provide any credit lines, but there are partner organisations that receive credit
lines from other entities. Credit lines are useful when the financial institution or partner
organisation does not have sufficient means to provide further loans. But as with any external
credit, the target group must have the necessary economic potential to repay the loan at
market rates. Credit lines have to be given to specialised and professional NGOs or MFIs in
order to ensure sustainability of the access to credit.
(please see the report) |
| ID: |
42076 |
| Author(s): |
ECRC |
| Publication date: |
13/11/08 |
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Created: 20/11/08. Last changed: 09/03/11.
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