Savings-led Microfinance:A Growing Force in Global Development
Savings-led microfinance is today gaining significant traction as a development tool, with a growing number of businesses, financial institutions and NGOs now viewing this method of supporting financial inclusion as best practice. At Barclays we see huge potential in the Village Savings and Loan Associations (VSLA’s) that form the core of savings-led microfinance, and for the past three years we have set up a pioneering partnership, Banking on Change, to build momentum in this space in a number of developing countries.
By our calculations, the global economy, and particularly developing nations, could receive a yearly savings boost of up to $157bn if the 2.7bn adults worldwide who are ‘unbanked’ participate in savings-led microfinance programmes.
The figure is part of a new report launched this week in the House of Lords that concludes the ability to make real progress in financial inclusion, including linking participants with the formal financial system, will not be possible without closer cooperation of banks, NGOs and Governments.
The report ‘Banking on Change: Breaking the Barriers to Financial Inclusion’, produced by Banking on Change partners Barclays, CARE International and Plan UK, examines the barriers to financial inclusion in developing countries and the potential boost to the global economy that large scale financial inclusion represents.
Banking on Change is the world’s first savings-led programme that combines the deep understanding of poor communities among two leading NGOs with the financial expertise of a global bank, in order to encourage extremely poor people to begin their path to ‘financial inclusion’ through savings-led microfinance.
After establishing a savings culture, most people go on to receive financial training and establish micro-enterprises before additional access to credit or more formal banking is considered. The partnership is paving the way for future NGO/private sector partnerships that can improve the lives of poor people and ultimately have a business benefit by opening up a new customer base ‘at the bottom of the pyramid’.
The Banking on Change partnership has reached 513,000 people in just three years. On average, each member has saved $58 per year through savings groups. Multiplying this figure by the 2.7bn unbanked people could represent $157bn in savings annually. Where these savings groups are then linked to the formal financial system this could provide an influx in banking deposits, which could in turn be used to finance businesses and households.
One of the report’s key recommendations is that for any financial inclusion programme to be ultimately sustainable, it must offer a formal financial linkage model with the banking sector, and that this requires much greater co-operation from local and global financial institutions.
While huge development advances have been made to improve the lives of people living in extreme poverty in the last decade, 2.7bn people remain locked outside of sustainable human development until they can be integrated into the global channels of buying and selling, including having access to finance and a bank account. The report calls on governments, banks and NGOs to realise the un-tapped potential of the funds unbanked people have trapped in the informal sector.
The other key recommendations in the report are:
- Members of the UN High-level Panel, including David Cameron, identifying a new international framework to replace the current Millennium Development Goals after 2015, should ensure financial inclusion is on the agenda.
- National governments, donors and financial services providers should recognise, and support, the scale-up of savings-led microfinance solutions as part of an overall strategy for tackling poverty.
- Governments should invest in, and extend, access to financial education, with a particular focus on women and young people, whilst also increasing provision of training in business skills and entrepreneurship.
- Financial institutions and regulators should recognise community-based savings models and support the development of appropriate, transparent products that protect poor people’s money, whilst opening up access to outreach banking and mobile technologies that can facilitate group banking.
Barclays believes strongly in these recommendations and the concept of savings-led microfinance, and as such has committed to renew the award-winning ‘Banking on Change’ partnership with a new £10 million, three-year investment.
The key success of Banking on Change has been to transform a theoretical approach to microfinance into a world-leading programme supporting almost half a million people on the road to financial literacy and inclusion. This new investment will help to ensure the programme can continue making a real difference towards alleviating poverty in the developing world. We urge other financial institutions worldwide to consider whether savings-led microfinance could become part of their offering. That it will have a major positive impact on development is now undeniable.