April 24, 2017
The Promotion Model
Microfinance is a way for people suffering from poverty to set up financial systems with the goal to alleviate poverty by allowing them to save and also develop access to insurance, loans, and money transfers. By creating new financial systems or using the ideas of current systems to correlate with the needs of those living in poverty; the outcome to improve lives becomes a reality (Fikkert, 156). The World Bank says that financial inclusion, the ability for the poor to access financial services, is a key enabler to “reduce extreme poverty and boost shared prosperity.” Financial inclusion has been identified as an enabler for 7 of the 17 sustainable development goals (“Overview”). The World Bank estimates that “2 billion adults worldwide don’t have a basic bank account” (“Overview”). When people experience financial exclusion, they are unable to have access to useful and affordable financial products and services that meet their needs such as “transactions, payments, savings, credit, and insurance” (“Overview”). When these products and services are provided in a realistic, responsible, and sustainable way; people are able to flourish. Some groups are more financially excluded than others like women, rural poor, and other remote populations.
Modern microfinance began when one man, wanting to serve the poor, went against the status quo to find a way to loan impoverished people money. Despite the obstacles and people’s assumptions that poor people would not repay loans, he set out to prove them wrong. Muhammad Yunus loaned a small amount of money to a women who was enduring the pressures of loan sharks. She repaid the loan. This started the Grameen bank. Yunus was filled with compassion and leaned on the belief that if someone is given a chance, they can lift themselves out of poverty. This has led to the development of microfinance (Greer, 95).
I chose to learn more about the promotion model in an effort to learn other ways towards sustainability that I can share with my friend in Uganda. Now that we are operating a nonprofit together, focusing on the holistic care of vulnerable children in his community, we both can have an understanding of microfinance and see if this model could potentially be utilized in the future.
Brian Fikkert references William Carey, the father of modern missions, as starting the savings-led approach when he started savings banks for Indian farmers two hundred years ago (254). Although microfinance, savings and credit association (SCAs) have been created, it seems there is still much work to do to reach the extremely poor. The World Bank figured that in “2013, 767 million people lived on less than $1.90 a day, down from 881 million in 2012 and 1.85 billion in 1990” (“Poverty Overview”). Maybe a solution to this issue is a form of holistic microfinance model that is participatory and encompasses allowing people to meet material needs, as well as focusing on their spiritual needs.
Peter Greer in his book Created to Flourish explores the reasons why poor people need to save money. They need to save to invest in businesses or people can save to be prepared in the event of an emergency. Saving money helps people prepare for the future. Saving is flexible and less risky than loans. However, many poor people reside in living conditions that do not allow them to hide money and many live in remote areas with no access to financial services, making saving difficult. Sometimes the poor may have access to financial services but the fees are too much for them to pay leaving them without other alternatives. There are some church-based SCAs and there are nonprofits, such as Hope International and Care International that reach out to communities to partner with them on savings-led models.
Hope International distinguishes between SCAs and MFIs (Microfinance Institutes).
SCAs are groups of individuals who save their money together in partnership with the local church. As they build a secure sum of money, members often take out loans from their group to pay for household expenses or invest in businesses. Microfinance institutions are banks designed to serve entrepreneurs in poverty by providing small loans, a safe place to save, and other financial services to help men and women invest in their businesses and provide for their families. (“A Holistic”)
Variations of SCAs are abound and money amounts can vary depending on the country, however SCAs allow poor people to save, earn money, have access to loans, and provide themselves with insurance. The disadvantages are few and if one is encountered there is usually a way to overcome the challenge.
This paper will first focus on the exploration of the promotion model of microfinance and will dig dipper into informal financial systems called accumulating savings and credit associations (ASCAs), rotating savings and credit associations (ROSCAs), and village savings and loan associations (VSLAs). Second, discussing how these microfinance systems are applicable in different environments and ways to implement them.
The promotion model requires an organization like a church or missionary to become a promoter of a SCA where the loan capital comes from the members forming the association. This model focuses on brokenness at an individual level as well as at a systemic level for all types of poverty (Corbett, 195). The church or missionary never touches the money allowing churches the ability to avoid confronting people to repay loans. Brian Fikkert addresses the fact that “people treat their own money differently than they treat other people’s money.” The members, not the organization, own the association. The organization provides the technical training along with evangelism, counseling, prayer, and discipleship (Fikkert, 252). SCAs work because they follow the six financial systems design principles (Fikkert, 210).  People would rather save than barrow but with limited options, SCAs provide a sustainable way for the poor not only to invest but to have a way to pay for household needs as well. SCAs flexibility allows members to meet a range of needs while possessing the ability to reach all levels of poverty. Though building a savings may be slow for the destitute, the end goal is worth the struggle. Another struggle with SCAs may include people who have become customary to receiving handouts making it hard for them to shift to savings. This happens if relief continues when development should be taking place. SCAs are effective and members often stay in compliance because of relational peer pressure.
There are variations on how the promotion model is achieved. Another important advantage is that this model includes the use of indigenous knowledge using the asset based participatory development principle, where the focus is on assets and not just needs. Participatory meaning that there is no standard model for the vast differences of culture, communities, and context. Steaming from these variations are the ASCAs, VSLAs, and ROSCAs (Fikkert 264).
Through The Chalmers Center, churches that are considering the promotion model can access resources and assessments to help them determine if they should seek out developing a program. Chalmers is a church based SCA facilitator. Chalmers has trained churches and ministries in over 100 countries around the world to use SCAs as part of a holistic ministry to those in poverty (Greer, 93). The first step is for the church to adhere to the Integral Mission Principal:
The global body must function in such a way that the local church is able to use its gifts to engage in integral mission: proclaiming and demonstrating among people who are poor the good news of the kingdom of God in a contextually appropriate way. (Fikkert, 48)
If there is no local church, the outside church wanting to facilitate a SCA should still adhere to this principal, interview locals, and maintain the asset-based approach. Interviewing locals and asking questions such as; do they save and access large sums of money? How do they do this? Are there local SCAs or ROSCAs? Are there organizations promoting any of these models? Would the people like the church to promote an SCA (“International”)? The resource section of the Chalmers Center website provides user guides on promoting an SCA whether through a church or missionary.
Chalmers and their stories of impact demonstrate that people are reducing poverty by starting savings groups. The center shares a story of Dovi from Togo. Being involved in a savings group has led her to pray and be closer to God. She plans to open a larger sewing shop with apprentices so she can help other people who are financially struggling and share the Good News with them as well (“Stories”). Not only will she be teaching a skill, and the concept of the savings group, she will be teaching about the most important person; Jesus.
Accumulating Savings and Credit Associations
Savings-led approach is the heart of the promotion model. ASCAs are a variance of SCA. They operate when the members of the association rely on their savings for capital. The capital then provides loans and savings to the members. Members decide the terms of the association such as how much they will loan, how many times they will loan, and the terms of the loan. ASCAs are flexible and can be either time bound or non-time bound. ASCAs are better able to meet needs of the members while also requiring them to have bookkeeping skills and trust of leaders to secure the money saved. Therefore, they will need accountability and transparency. The member’s loanable money grows and so does the responsibility to manage those funds. Loanable funds grow because members repay the loan plus interest along with paying their regular savings input. Members also have the opportunity to earn money on their savings that comes from interest charged on the loans. Members are allowed to withdraw from their savings. Since poor people in rural areas have a hard time accessing banks and other services due to their locations and inability to pay high fees, they now have reliability and convenience from their local ASCA (Fikkert, 167-9).
According to Greer, people are able to join more than one SCA. If a SCA is set up for all members to make the same payments each week for the same number of weeks, people can set up the SCA like a credit union, adding record keeping to the association, therefore allowing people to make variant amounts of payments, which can all be determined in the terms of the association (91).
The church can implement training of trainers. Specifically, indigenous or local missionaries; however outsiders have the ability to partner and train locals. Training can include tools to use, bookkeeping, and management. Those trained can then reach out and train people who will start and lead another SCA. The training then continues and multiples across regions.
People entering SCAs that are faith based, now have a community to pray, study the Bible with, and even support nonmembers by demonstrating love of their neighbors and providing loans at much better rates than loan sharks (Corbett, 193).
Village Savings and Loan Associations
VSLAs are great models to reach the very poor not only because it does not require capital from outside funding organizations, but also they make it easy for people with all levels of education to implement the model. Microfinance institutions (MFI) have a harder time reaching the very poor because of high overhead costs and if credit is needed in rural areas, the amount is often too little that it’s not worth it for MFIs to reach the very poor. The poor are in need of savings not debt and therefore, MFIs focus on urban areas. “The assumption that the poor want business credit more than any other financial service is not true” (Reaching”). VSLAs run with very little costs and are self managed by the members allowing them to save, finance, and access insurance to cope with emergencies. VSLAs require groups of people to come together and save and then take small loans from the savings. One example of a VSLA comes from VSL Associates. There are annual elections with about 5 people on the management team along with 15 to 25 people that decide to join the association. The group will meet for one year, after which the accumulated savings and the loan profits are distributed back to members. Having a lock box with three different locks prevents fraud or stealing. Three different group members are appointed key holders.
Groups meet weekly and members save through the purchase of shares. The group members decide the price of one share. At each meeting, every member must purchase between 1 and 5 shares. The share-price is set by the group at the beginning of the cycle and is fixed for the entire cycle. Savings are maintained in a loan fund from which members can borrow in small amounts, up to three times their individual savings. Loans are for a maximum period of three months in the first year and loans may be repaid in flexible instalments (sic) at a monthly service charge determined by the group. (“Reaching”)
The members can even set up a social fund, which stays at a certain amount to act as insurance and remains an asset to the group that is allowed to be accessed later if needed.
Care international is another organization that utilizes VSLAs where members of a group are trained for a year on management and governance, which allows them to train others in their community and become self-sufficient (Brannen, 4). Care international improved ROSCAs with VSLAs in three ways; barrowing from groups savings can be done at any time, members can contribute, and barrowers pay interest on loans to the group (Brannen, 7). Care International’s VSLA functions very similar to that of VSL Associates. Care International added that members are able to take out loans no matter how many shares they have given, however the loan can be no more than three times the value of their shares. Loans are one month in length and never fine barrowers for late repayments. The group does not receive capital from Care or any other organizations.
A study done by Conner Brennan and Damien Sheehan-Connor examined a VSLA in Zanzibar, Tanzania with the highest rate of extreme poverty and poorly educated people. Results of the study suggest the VSLAs are sustainable with an overall positive impact on various indicators of household and individual welfare, including asset expenditure levels, the development of income-generating activities, spending on education, access to health services, nutritional levels, and quality of housing. They discovered that microfinance programs have different impacts for women and men. In particular, programs targeted to women tend to have bigger impacts on measures of household welfare including the education, nutrition, and health of the children (Brennan, 27).
Rotating Savings and Credit Associations
ROSCAs are used when formal financial markets are unable to screen rural loan applicants due to lack of equality. They serve mainly people in developing countries that are sidelined access to formal financial markets. ROSCAS do not protect against risk, but do allow people to deal with single financial events. ROSCAs work because the group members are from close knit communities with strong relationships.
There are two types of ROSCAs: random and bidding. In the random types, people in a group contribute fixed amounts of money and then they decide who would receive the contributed funds. This system happens until each person has had a chance to receive the funds. In the bidding, people set up bids and the highest bidder collects the funds. After a person has collected the funds they are no longer able to bid giving each person in the group an opportunity to collect during a bidding cycle (Kimuya, 1299-1300).
ROSCAs are not as flexible because they give the entire loanable sum of money to a single person, once its members have established rules. The loanable funds are fixed in size and does not allow for the funds to grow over time, and members earn nothing on their savings. However, bookkeeping skills are not needed and ROSCAs reduce the opportunity for fraud (Fikkert, 167-9).
Peter Kimuya conducted a study in two rural communities in Kenya and Tanzania. It was discovered that urban areas used funds from ROSCAs to finance “consumer durables” that are not easily financed through monthly earnings. In rural areas, funds are used to “finance agricultural implements and inputs.” He found that funds were used for both investment and consumption. The Kenyan community used ROSCAs at a greater need than Tanzania. This leads to “evidence of differences in the level of market penetration and relative rural transformations, and in the application of different strategies for compensating for failures in the local financial markets” (Kimuya, 1306). Kimuya concludes that reasons people join these savings groups is consumption driven. They need money to pay high expenses, food, or for investment activities. People prefer to join ROSCAs with large memberships and wait longer for their turn (1307).
Gina Buijs states that ROSCAs provide an alternative to the mainstream, which generally excludes the poor (62). When people join this alternative, it helps them
maintain social contacts, which helps the member in times of difficulty, and also provides social contact in a situation where kin are not always available. Although the members of these associations are aware that they risk losing their savings if fellow members default on their contributions, various steps are taken to try and ensure that this does not happen. In addition, lending out sums at interest also provides an incentive for members to join – not merely to save, but also to make money. (Buijs, 63)
Implementing Savings-led Approaches
Establishing an SCA in a community that has no knowledge of savings-led approaches may not be eager to participate if their community has been saturated with charity. People may feel they can just wait for handouts from charities that do not require anything from them. Some organizations may have been viewed as harmful to the community and therefore trust may be lacking. One of the best ways to introduce a SCA model is to work with a trusted community member by developing relationships first (Greer, 145). Another entry point is through the local church. The church is often influential to communities with a moral compass that could make great distributors of SCAs. Christ-centered SCAs have the ability to demonstrate and deliver the Gospel message and train people in group formation, biblical principles, building relationships, and other topics (Greer, 159). SCAs are natural avenues to provide two key elements that break people out of poverty: training and capital. When churches and SCAs partner together there is a holistic transformation that happens especially as people hear the Good News and answer the call of Jesus.
After one of these savings-led options or a variation of it is implemented and people are able to save, loan, and access insurance, there is what C. Neat Johnson in his Book Business as Missions (BAM) refers to as four camps or faith-at-work organizations; tent-making, marketplace ministries, enterprise development, and BAM (129). These camps are where churches, business people (local and nonlocal), and others come together in the efforts for nonlocal business people to partner with local business people through different business endeavors and economic development. This can include creating businesses that produce jobs that helps people out of poverty and raises the wealth of the community. Through BAM the business may or may not be locally owned.
Once a savings-led approach is established there are even more possibilities for communities and people to become self-sustainable and experience economic growth.
SCAs are a practical way for poor and extremely poor people in rural areas to provide themselves with savings, loans, and insurance. The SCA groups can stop relying on outside donors or predatory lenders and truly become self-sufficient. Since many MFIs do not benefit from offering small loans and some loans may come with exorbitant rates leading to a vicious cycle that the poor person has a hard time escaping, SCAs are wise and resourceful. For SCA members that struggle to manage their groups: churches, ministries, or any individual willing to partner with the community can promote and train people to operate SCAs. When churches promote SCAs, the church is not providing money. They provide the Gospel message, discipleship, and possibly training on record keeping and group management. The church or missionary are holistically caring for people in an asset-based approach allowing the people themselves to save, loan, and handle their money. SCAs may vary according to the context or culture, however there are two common traits; SCAs are effective and can avoid paternalism. Churches or missionaries considering partnering with a community with no church or knowledge of SCAs, it’s important for them to remember and maintain the Integral Mission Principal. They should interview the community, and really seek to understand if the community has heard of savings-led approaches and would like to start one. The church of missionary then becomes a facilitator allowing the locals to take charge. SCAs have the potential to positively transform lives and structures, however there still needs to be a holistic approach to ending poverty. Microfinance will not end world poverty and without changed hearts, microfinance will not change the way people behave or spend their money. “Microfinance is an opportunity, not a total solution” (Greer, 135).
“A Holistic Approach.” Hope International. http://www.hopeinternational.org/what-we-do. Accessed 27 Mar. 2017.
Brannen, Conner and Damien Sheehan-Connor. “Evaluation of the Impact of Village Savings and Loan Associations Using a Novel Survey Instrument.” Development Southern Africa, vol. 33, no. 4, July 2016, pp. 502-517. EBSCOhost, doi:10.1080/0376835X.2016.1179097.
Buijs, Gina. “Savings and Loan Clubs: Risky Ventures or Good Business Practice? A Study of the Importance of Rotating Savings and Credit Associations for Poor Women.” Development Southern Africa, vol. 15, no. 1, Mar. 1998, p. 55. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=aph&AN=8508585&site=ehost-live.
Corbett, Steve and Brian Fikkert. When Helping Hurts: How to Alleviate Poverty Without Hurting the Poor and Yourself (New Edition). Chicago, IL: Moody Publishing. 2012. Print.
Fikkert, Brian, and Russell Mask. From Dependence to Dignity: How to alleviate Poverty Through Church-Centered Microfinance. Zondervan. Grand Rapids, MI, 2015. Print.
Greer, Peter, and Phil Smith. Created to Flourish. Hope International. Lancaster, Pennsylvania, 2016. E-book.
“International Microfinance Resources.” The Chalmers Center. 2015. Downloaded the Promotion Model Assessment. http://www.chalmers.org/portal/category/international-microfinance-resources. Accessed 20 March 2017.
Johnson, C. Neal. Business as Mission: A Comprehensive Guide to Theory and Practice. IVP Academic. 2009. Print.
Kimuya, Peter Kiko. “Rotating Saving and Credit Associations in Rural East Africa.” World Development, vol. 27, no. 7, July 1999, p. 1299. EBSCOhost, search.ebscohost.com/login.aspx?direct=true&db=aph&AN=1995054&site=ehost-live.
Massu, Maude, et al. “Comparative Evaluation on Community- Managed Savings-Led Approaches in the Mekong.” Care International: Australian Aid. Jan. 2017. http://www.care.org.au/wp-content/uploads/2017/03/SLAM_Evaluation_Report_CARE_FINAL_for_FDC.pdf. Accessed 31 March 2017.
“Overview.” The World Bank. 2 Oct. 2016. http://www.worldbank.org/en/topic/financialinclusion/overview#1. Accessed 28 March 2017. Web.
“Poverty Overview.” The World Bank. 2 Oct. 2016. http://www.worldbank.org/en/topic/poverty/overview. Accessed 27 Mar, 2017.
“Reaching the Very Poor: The Need for a New Microfinance Model.” VSL Associates. vsla.net. Accessed 27 Mar, 2017.
“Stories and Impact.” The Chalmers Center. http://www.chalmers.org/our-work/intl-savings-group-training/stories-and-impact/. Accessed 29 March 2017.
 Financial systems design principles are 1. Trust 2. Discipline 3. Financial sustainability 4. Leadership, management, and governance 5. Transparency 6. Fit the target population