Invest In a Process, Not a Transaction: Lessons Learned on Linking Business Savings Groups to Banks

> Posted by Hannah McCandless, Program Support Associate, Village Enterprise

Through its one-year graduation program, Village Enterprise provides business and savings training, access to savings groups, seed capital, and mentoring to rural East Africans living in extreme poverty. The program combines these grassroots interventions with linkages to financial institutions, increasing the financial capability of the extreme poor. In the second part of this series, Village Enterprise reflects on some of the learning gained through these interventions, focusing on amplifying progress made at the grassroots level through linkages to formal institutions.

The adoption of attitudes, habits, and behaviors needed for healthy financial decision-making is an essential first step in preparing individuals to be consumers of financial services. But just because households regularly save money or understand the risks of microloans does not necessarily mean that they are ready to evaluate and take-up formal financial services on their own. To be effective, financial inclusion interventions for those living in extreme poverty, at the base of the pyramid, need to both foster financial capability and facilitate healthy linkages to financial institutions.

Recognizing this need, Village Enterprise is working to establish linkages between our Business Savings Groups (BSGs, our version of VSLAs) and formal financial institutions. However, as we have learned, linking our BSGs to the right financial institution is easier said than done. We have found that creating healthy linkages is a multi-step process, rather than a one-time event.

Banking for the base of the pyramid

In a CFI blog post about a year ago, Ellen Metzger, a former member of the Village Enterprise team, reflected on the East African financial inclusion landscape in which we work. Metzger’s post details the obstacles our participants face in accessing financial services, and cites a lack of credible information, irrelevant product offerings, and inadequate rural access.

Reaching and empowering those living in extreme poverty demands more than a suite of expensive services or a savvy mobile app. It requires an understanding of the unique needs, limitations, and potential of the rural poor. It calls for a staff dedicated to high-touch engagement with consumers, infrastructure to meet consumers where they are, and services that both respect the limitations of the BoP and offer room for growth.

Savings first

As explored in the first post in this series, the Village Enterprise graduation program facilitates behavior and attitude changes needed to increase financial capability. Before linking participants to formal financial services, we first foster a culture of savings and healthy financial management at both the household and VSLA levels.

In seeking to link our BSGs to banking services, we put savings as the number one priority. To amplify the savings habit we instill in our participants, we pursue linkages that will allow our BSGs to access a secure means of growing their savings from the formal financial institution, while still maintaining the flexibility to allow the BSGs to offer loans and collect interest among the groups’ members. Prior to researching the lending products a bank offers, we ascertain whether they are able to offer this vital basic service.

Translating priorities into linkages

Using these criteria, as we developed our program in Uganda, Village Enterprise explored potential linkages with a number of banks. First, we discovered that most banks lacked the structure for adequate rural access. What’s more, we found that while some do offer services to VSLAs, they neglect savings and prioritize loans, often with interest rates and fees that are too high for the base of the pyramid.

After extensive due diligence, we selected Post Bank Uganda, which targets rural farmers and is government owned, for our pilot partnership. Post Bank strives to empower customers by offering financial services in a manner sustainable for lower-income clients. It has 37 branch networks, 9 mobile banking vehicles, 90 points of sale in various SACCOs, mobile money transfers available through MTN, Airtel, and Africell, and managers in every branch that focus on VSLAs. We found that Post Bank could provide service to all the areas we work. Furthermore, their group savings account offering looked to be the ideal product for our BSGs to prioritize growing their savings while still independently maintaining their loans and lending practice. We found that Post Bank was far better positioned to work with the rural poor than the other institutions we researched.

Healthy and sustainable linkages are a process, not a transaction

However, identifying a partner was just the beginning of our linkage journey. Shortly after starting to link our BSGs with Post Bank across Uganda, Village Enterprise encountered challenges with the bank’s decentralized structure and found that our success varied greatly by branch. In Northern Uganda, the Post Bank VSLA manager was highly motivated and collaborative, which resulted in 23 out of our 30 BSGs in this region opening accounts with Post Bank last year, and all are opening accounts this year.

However, when VSLA managers in other regions were missing meetings, delaying communication, and demonstrating an inability to work well in rural communities, we questioned whether Post Bank was prepared to meet our needs in these regions. We take our relationships with the communities we serve very seriously and are hesitant to introduce a partner who might jeopardize those relationships. We learned that what works for one BSG won’t necessarily be the right linkage for all.

So, we had to go back to the drawing board to rethink our linkage strategy countrywide. In the end we decided that while we will continue to work with Post Bank in regions where the partnership is proving successful, our pilot demonstrated a need to identify additional potential partners. We can better serve our BSGs by vetting and introducing potential partners and allowing them to pick the best option, rather than relying on a “one-size-fits all” solution.

This approach, which we also use with our Kenya BSGs, acknowledges lack of information and access as barriers to entry, but respects the agency and ownership of BSG members and leadership by putting the ultimate decision in their hands.

These realizations taught us that facilitating linkages that work for the poor is a time-intensive process rather than a one-time transaction. While signing a national MOU with a single partner seemed like an efficient and effective means of establishing linkages, we found it necessary to work BSG by BSG to evaluate the needs of each, then provide choices for the right institution that would result in linkages that are healthy and sustainable in the long run.

Create change in people and amplify effectiveness through linkages

CFI’s landscape study on financial capability notes, “Successful financial inclusion requires financially capable consumers who use products actively for their own benefit.” At Village Enterprise, we see this as a two-fold process: village-level trainings and membership in a self-managed BSG help to build financially capable consumers; then, engaging in a linkage process, rather than transaction, to the right financial services so that participants can use financial services actively, and for their own benefit.

Image credit: World Bank

Have you read?

Harnessing Behavior Change to End Extreme Poverty

Finding a Bhutanese Path to Financial Inclusion

How Women Help Women Gain Control of Their Financial Lives