As the European Microfinance Award 2020 on 'Encouraging Effective & Inclusive Savings' moves to its final Selection Committee and High Jury stages, and the announcement of the winner during European Microfinance Week in November, e-MFP will be publishing pieces from various experts who have worked in Savings over the decades. These contributions – beginning with this one from Hans Dieter Seibel, a pioneer in the field – are lightly edited for clarity and length.
Encountering informal inclusive finance
In 1963 I went to Nigeria for a study on Industrial Labor and Cultural Change. In my interviews with factory workers, I found that many saved in a saving club, an ‘esusu’, and were looking forward to establishing their own small enterprise with esusu savings. Nigeria has a flourishing SME sector, spanning everything from hairdressers to app developers, from restaurants to hotels, and from welders to film production houses. Informal savings clubs and, more recently, microfinance banks (now organised in the Nigerian Microfinance Platform, which visited e-MFP in February), all savings-led, are their main sources of finance.
I learned that the esusu dates back to the 16th century when it was carried by Yoruba slaves to the Caribbean, and from there, eventually, by immigrants to most North American cities. From Nigeria, savings clubs and doorsteps savings collection with monthly payback (ajó) have spread over much of western and central Africa and beyond: indigenous, self-reliant, sustainable.
This was my first encounter with informal finance: savings-led! The subject intrigued me, and I next studied what I called indigenous cooperatives in the ethnographic literature on West Africa, a fertile ground. In Dahomey (now Bénin) for example, Herskovits (1938:250-253) reported on a gbe with more than a thousand members, a multilayered savings association expanding into Togo and Nigeria. But what did this show, a number of isolated cases or a wider picture? I found the answer in Liberia, where in 1967-68 I surveyed indigenous cooperatives in all 17 ethnic groups. Indeed, the wider picture covered savings and credit groups as well as rotating working groups, presumably the historical origin of rotating savings groups (in the words of a farmer in neighboring Côte d’Ivoire: “le travail, c’est notre argent”). In towns, rotating savings groups predominated; in villages, where regular incomes were rare, people formed accumulating savings and credit associations (ASCRAs), with small regular equity contributions. In 1991, CARE built on the ASCRA experience in Niger, subsequently joined by numerous other organizations promoting VSLAs or Savings Groups, with more than 15 million members in 73 countries as of 2019.
With the ASCRAs in Liberia I felt at home: Urmitz is everywhere, I noted. Urmitz is my home village where, back in 1889, some 15 farmers and craftsmen formed a self-help group. Annual interest rates were set at 3.5% on deposits and 5.5% on credit balances. At minimal costs and no loan losses, the association turned a profit from the first year onwards. In the same year a credit cooperative law was enacted, the group joined the Raiffeisen movement, kept growing, and eventually, in 1934, came under the banking law: as a Raiffeisen bank.
This experience inspired me, from my new base in Princeton NJ, to submit a proposal to USAID to help build a grassroots financial system on indigenous foundations. Unfortunately, the proposal, in 1969, was a few years early; it was only in 1973 that USAID sponsored the Spring Review on Small Farmer Credit, a scathing report of targeted credit and credit-driven agricultural development banks (AgDBs). 15 years later, with GTZ, I designed a different strategy: linking banks and self-help groups, starting in Indonesia, the Philippines and India.
From microcredit to microfinance
I then watched with astonishment the rise of the microcredit movement, entering into the void left by declining support to AgDBs. Astonishment because the new credit-based NGOs suffered from similar flaws as the AgDBs: donor dependency, credit bias, lack of self-reliance and profitability, and the absence of appropriate regulation and supervision. Plus they added a new gender bias.
In 1990 I attended a program of the Economics Institute in Boulder, Colorado in World Banking and Finance. Asked for a review, I proposed two program areas, one of them to be newly coined microfinance, with a focus on savings-led institutions. With the creation of CGAP, this eventually led to a paradigm change, the “microfinance revolution”, and spurred the reform of existing, and the creation of savings-led new, MFIs, among them inclusive microfinance banks.
Two centuries of inclusive savings and cooperative banking: the German experience
This paradigm change has a long prehistory. Since the 17th century, Europe experienced tremendous increases in poverty. These were not remedied by the subsequent agrarian and industrial revolutions; with new displacements and upheavals, traditional safety nets broke down, mass poverty spread. Preceded by pawnshops, widows’ and orphans’ funds, a new type of local institution began to evolve around 1800: the savings fund (the Sparkassen), placing the poor at the centre, helping them save for emergencies, necessities, and old age. The Sparkassen offered special incentives to the poor: free doorstep collection services and stimulus savings interest rates. Their numbers and funds increased rapidly, enabling them to extend their outreach and offer credit to the ‘industrious and enterprising’, such as craftsmen. From the start they were inclusive, with services to the poor, non-poor, and eventually SMEs and the city or district for community investments.
In 1838 they came under the Savings Banks Act, and in 1934 under the Banking Act, as autonomous corporate entities under municipal trusteeship. During the early 20th Century, their number grew to over 3,000 local banks. With increasing competition, there has been a process of mergers. As of 2018 their number stood at 385, with 9,818 branches, 50 million customers, €788 billion deposits and €1.24 trillion total assets (incl. €440 billion in SME loans).
A different history of microfinance started around 1850 in response to a severe famine, with self-help groups at the centre. Initial support was charity-driven, but this proved unsustainable and was replaced by savings and credit associations, owned and governed by their members. The first urban SHG was initiated by Schulze-Delitzsch in 1850, the first self-reliant rural SHG by Raiffeisen in 1864, soon organised into separate federations of respectively Volksbanken and Raiffeisenkassen (merged in 1974). Legal backing was provided in 1867 by the first Prussian credit cooperative law, followed in 1889 by a revised national law, with substantial innovations: limited liability and mandatory auditing. This led to an explosion in the number of credit cooperatives, which peaked at 22,000 around 1934 when they came under the banking law. As a result of mergers, as of 2018 their number has come down to 875, with 10,520 branches, 30 million customers, €562 billion deposits and €945 billion total assets (incl. €282 billion in SME loans).
The savings and cooperative banks are two of three pillars of the German banking system, providing inclusive universal banking services to all segments of society, including MSMEs. Self-organised federations, central funds and auditing apexes, and appropriate oversight, have played crucial roles in their development. Government has been kept at bay. Ultimately, their strength lies in the mobilization of local savings for the local economy: the foundation of their crisis resilience.
What role for government in cooperative banking? The case of India and Vietnam
Since around 1900, the German credit cooperative model has spread around the world. In 1904, the British Raj, inspired by Raiffeisen, introduced the Co-operative Credit Societies Act of India. By the mid-1920s, this had given rise to some 50,000 self-reliant credit cooperatives, backed by a network of cooperative banks. But ultimately, the Indian state governments played a destructive role: by taking over the operations of the cooperatives rather than providing a regulatory operating framework. By 2006, more than half of the 106,000 credit societies (PACS) were insolvent, and more than one-quarter of the 1,112 cooperative banks reported losses. Much of the rest of the sector was kept afloat by capital injections, perpetual loan rescheduling, and generous accounting practices. Reforms are struggling: it is a sector which is too big to fail and too sick to heal.
A contrasting story starts with the collapse, in the 1980s, of the socialist command economy and its cooperatives in Vietnam. In the early 1990s, the government launched a fresh credit cooperative initiative as part of development of a market economy. A research mission identified Raiffeisen cooperatives as the model of choice. Operating under a new name – People’s Credit Funds (PCFs) – one of the most impressive credit cooperative movements emerged. PCFs are savings-based, prudentially regulated and supervised by the central bank (SBV). By closing nearly 100 PCFs at the end of a pilot period, SBV signalled the enforcement of compliance. By 2014 the number of healthy PCFs had grown to 1,145 with over four million clients; the NPL ratio was 0.97%, ROA stood at 1.03%, and ROE at 16.02%. Deposit rates were 2-5% and lending rates 6-8% p.a. in real terms. Neither the Asian financial crisis of 1997/98 nor the global crisis of 2008 affected the PCFs. Most importantly, in contrast to India, the PCFs have not served as a tool of political favouritism; they have relied on their own resources, engaging in unimpeded financial intermediation. Since 1995 the PCFs have been backed by a Cooperative Central Fund (CCF), transformed in 2013 into the Cooperative Bank of Vietnam.
Two savings-led commercial banks
Moving afield, there are two savings-led commercial banks that are the product of transformations: Centenary and BRI. Centenary Bank in Uganda started in 1983 as a “trust fund” as a Catholic initiative. In 1993 it transformed into a full-service commercial bank with a mission of microfinance service to all people in Uganda particularly in rural areas. It did well in savings, but failed in lending, and almost collapsed. But with 73 branches and 4,404 bank agents as of 2018, 5.7 million customers, total assets of $751 million, 1.64 million deposit accounts with a balance of $540 million, and a loan portfolio of $362 million (56% micro- and 40% SME credit) at an NPL ratio of 2.67%, Centenary calls itself Uganda’s leading Microfinance Commercial Bank.
Bank Rakyat Indonesia (BRI) dates back to a member-owned Volksbank (bank rakyat) in the 1890s. This served as a model for decentralized local banking, by 1913 comprising 75 district banks, 12,424 “paddy banks” and 1,336 “money banks”. In 1968, BRI was re-established as a state-owned commercial bank and commissioned to set up a network of village units for subsidized agricultural credit. Performance declined rapidly, leaving BRI in 1983 with the choice of either closing or reforming its 3,617 units.
Technical assistance plays a crucial role in transformation, which eventually made the two banks presented above national leaders in inclusive finance. Centenary was assisted by the German Savings Banks Foundation, together with IPC. They provided a highly effective cashflow-based lending methodology and MIS, combined with powerful incentives for staff and borrowers. A new scheme of agricultural credit was based on an analysis of the household’s repayment capacity, rather than collateral. As microsavings continued to grow, far beyond the bank’s microcredit lending capacity, Centenary added SME lending, thus providing its microentrepreneurs with opportunities for graduation to SMEs.
BRI was assisted by HIID from 1984 to transform the village units into microbanking units. Their success has rested on two products, both with commercial rates of interest: a voluntary savings product with positive real returns and unlimited withdrawals; and a non-targeted credit product, open to all and available for any purpose. Driven by powerful incentives for customers (e.g. a refund of 25% if all interest payments are on time) and for staff (profit-sharing), together with mandatory loan protection life insurance and voluntary health insurance, these two products have made the microbanking units the largest and most successful national microfinance network in the developing world, resilient to the crises of 1997/98 and 2008. As of 2019, the units registered 65 million deposit accounts with a balance of $21.4 billion, and 10.6 million loans with a balance of $22.1 billion and an NPL ratio of 1.18% (≤1 day). With 9,618 operational and 227,436 electronic channel outlets, 422,160 bank agents, and, since 2016, its own service satellite, BRI, partially privatised in 2003, has by far the largest outreach of any bank across the Indonesian archipelago.
The two banks, in vastly different countries, nevertheless have much in common: savings-based self-reliance, individual lending, opportunities for graduating to SME mesofinance, and inclusiveness without a gender bias. They may be indicative of the future of inclusive finance, pointing the way to a new stage of institutional development.
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Photo: Monte Allen via Flickr