> Posted by Ellen Metzger, CFI

Community savings groups are at the heart of successful rural banking

Before joining the Center for Financial Inclusion at Accion, I spent four years in rural East Africa managing an ultra-poor graduation program. At Village Enterprise, we focused on savings group creation and distributed conditional cash transfers rather than livestock (as is customary with graduation programs) in order to empower choice and facilitate ownership among our participants. Over years of traveling the bumpy back roads of Uganda and Western Kenya meeting with hundreds of savings group members, I met very few participants who went beyond their local savings groups to take loans from financial institutions such as MFIs. Those few who did created great success stories. In light of the recent article “Your Inflexible Friend” in The Economist, which offers a review of microlending’s history, I reflect on why we don’t see microlending in the rural areas of Uganda and Western Kenya and how that can change.

A good reputation is critical. In these areas, tragic stories of delinquencies and defaults travel faster and are remembered longer than stories of success. In Kenya especially, where there is more competition in rural areas among financial institutions than in Uganda, reputation precedes the products and services. These reputations can vary dramatically every 5 kilometers you travel. When groups are asked about being linked to a particular financial institution, one community will trust the organization, the next community a few kilometers away will cringe at the name. Microfinance institutions are extremely sensitive to fluctuations in trust, so it’s imperative for them to design trustworthy products and ensure adequate follow-through on their services every time.

Trust is king. Once trust between members is lost, it is difficult to reclaim. We often saw this amongst the savings group members. Certain members of the community were reluctant to join groups where they didn’t trust existing members because of a past conflict. In certain cases, trust could be regained through hours of mitigation meetings and mentoring.

 It’s a vanilla product. Currently, products are typically one-dimensional and not tailored to the fluctuating incomes of the rural poor or the unique needs of different client segments. This is changing, however, as companies and organizations are doing more research and consulting with banking institutions to create innovative offerings for these customers, including loans with flexible repayment structures like VisionFund’s new digital financial loan product.

Lack of information. In rural areas, information often spreads through word of mouth. The majority of potential microlending customers in rural areas are illiterate and have limited access to radios, therefore they receive little to no “fresh” information. They receive information from their neighbors and community members. Given the potential of other community members defaulting or having negative experiences with an institution, this lack of information is a great risk for microfinance institutions trying to sell their products in these communities. This scenario also doesn’t bode well for building strong financial capabilities among community members that are less likely to be exposed to information pertaining to formal financial products and services.

Accessibility is still lacking. In the areas where Village Enterprise works, the closest town with a bank is typically 30 to 60 kilometers away, making banking expensive and unsafe. Most clients simply cannot pay the 60,000 Uganda shilling (~$20) round trip fee to town in order to make a $10 deposit on their microloan.

But as The Economist mentions, microlending is simply a “vital work in progress” and I’ve seen a few trends that will help expand financial inclusion to rural regions like those in Uganda and Kenya.

Partnerships connect to the BOP. Financial institutions are starting to partner with organizations like Village Enterprise or community groups like SACCOs that have the trust of the communities. The partner can make introductions to these communities and work with banking agents to ensure quality service delivery. Additionally, with partnerships, banks can leverage insight from those working at the base or very bottom of the pyramid to create products that work better for their clients. In Northern Kenya, BOMA Project and Kenya Commercial Bank (KCB) teamed up to increase mobile banking access in extremely remote areas. This partnership is opening up opportunities for the communities living in isolated areas of Kenya as well as increasing banking clients for KCB.

Increasing access to information. With mobile programming increasing throughout emerging economies, communities are finding alternative ways to access information. Companies like Voto Mobile and Text to Change have created new channels for information dissemination, which will ideally create a more informed generation. However, as detailed in Elisabeth Rhyne’s recent CFI blog post about what’s lost in a digital world, these technologies should not entirely replace person-to-person trainings or mentoring required for capacity building and increased usage. Increasing partnerships with local governments or institutions offer sustainable mechanisms for outreach to these communities.

Moving forward there remains a need for person-to-person capacity building for the positive financial behavior of clients

Banking regulations are improving. Banking regulations in emerging economies are helping to support banks to reach end users in rural areas. In 2016, regulations were finally passed in Uganda to allow agent banking throughout the country, which will hopefully create increased access to financial institutions.

Increased focus on capacity building. Village Enterprise and other graduation programs spend three months training savings groups on business development and financial education. These trainings help lead to self-sustaining and healthy savings groups as well as more financial savvy clients. For illiterate clients in rural areas, these programs are critical for the successful introduction and uptake of banking products, which is why they are increasingly offered by the financial institutions themselves through dedicated field officers.

Have you read?

Letter from Mindanao, Part 2: Rural Banking and the Promise of Cacao

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