Reply to Nicholas Kristof: Microcredit, microsavings? Microfinance.

In light of a few critical articles towards microfinance, I was pleased to read Mr. Kristof’s column about savings-led approaches to microfinance. CARE as mentioned in the column, pioneered a savings-led approach to provide access to financial services to women in Niger in 1991. Since then CARE has grown to become the largest international NGO providing financial services in Africa, a region where the World Bank recently concluded that in many countries only 10% of the demand for microfinance is met. The approach is called a Village Savings and Loan Association or VSLA. VSLAs are a way to harness the ancient practice of group savings and create a system of home grown microfinance. VSLAs work where formal financial systems often do not reach – the very poor and rural areas. They serve those whose savings and loans capacity is a few cents a week, those at the very bottom of the economic ladder. To participate in VSLAs one does not need to be literate, possess collateral, or have formal identification. VSLAs work on building assets and not on credit or loan based approaches – reducing risk for clients and encouraging saving behavior smoothening out consumption. The practice of saving has always been in existence- sometimes it might be as simple as saving seeds, a handful of grain or rice, or saving jewelry. When women participate in a VSLA they are able to save pennies a day and put those small amounts of money in a locked box. VSLAs enable the poor to create basic savings and then loan systems that are completely owned, managed and operated by the members. Members receive training, but no direct capital investment from outside. VSLAs require no physical infrastructure and are self managed. Training groups become self supporting and even establish and train other groups to become self-sustaining. After a few years, many of the members are capable of becoming clients of formal micro-finance institutions. This way, VSLAs serve as the crucial first rung in the economic ladder to prosperity.
There is an entire spectrum of financial services targeted at poor people, and there are innovative programs linking informal VSLA groups to larger, more traditional microfinance institutions- MFIs.

Financial services- especially savings-led approaches for the poor expand a woman’s ability to self determination. This is important since research shows that when women have increased participation in household research management, families tend to be better off- children are better fed and go to school, and they invest in improving their homes as well. Supporting the expansion of financial services for the poor is an important investment in maternal health because it can strengthen the opportunity for pregnancy by choice, and ensure access to skilled attendants through the pregnancy and post-partum periods, and to appropriate emergency care.

At this point, both public and private funds are needed to advance microfinance and grow the sector to scale. It is an appropriate use of public funds to support innovation in product development, technology, and institutional capacity-building that will lead to reaching hard-to-reach populations. This includes the very poor, those in rural areas, marginalized women, the disabled, and other unserved and underserved populations.