PART A: SAVING

CHAPTER 1: Saving first

What is saving?

Saving means withholding something valuable for future use. This simple phrase describes two key elements of any saving activity:

• Discipline and sacrifice: Withholding something valuable for future use instead of consuming it immediately.

• Planning for the future: Saving is all about the future, about anticipating and preparing for possible risks and emergencies (a bad harvest, sickness or death), preparing for upcoming events and expenditures (payment of school fees, a marriage, old age, or funeral) or starting a new business or expanding an existing one.

Why people save

Everybody saves, even the poor. It’s just that the poor have fewer resources to start with, and so can only save in small amounts.

People save for a variety of reasons:

• To prepare for future emergencies or risks (natural disasters, injuries, death).

• To smooth out variations in income and consumption: Saving during surplus periods to use during difficult periods.

• To educate their children.

• To be prepared for old age and disability.

• To invest in opportunities potentially profitable (purchasing a cow, starting a small enterprise, storing grain to resell during high price season, etc.).

• To fulfil social and religious obligations (marriage, funeral).

  

How people save

People save in many ways, as individuals or in a group. They may save in kind, in cash (at home or in a bank), or by giving.

• In kind: When prices are continually rising (high inflation), when there is little cash in circulation (barter economy), or when there is no bank around, saving in kind may make sense. In kind savers normally save in food-grains, like maize or rice, or in livestock, such as cattle, goats, or chickens, and sometimes in items like jewellery or gold or other valuable goods which increase in value as prices rise and can be easily resold for cash at a later date.

The disadvantages of in kind savings are that they tend to be less portable, more difficult to store and maintain (cattle are vulnerable to diseases, grains can be attacked by insects or rodents), less easily converted into cash, and more visible (sometimes people don’t want others to see that they now have more chickens or cows than they used to have).

• In cash: Almost everyone, including the very poor, has some need for cash: to buy medicine or pay for school fees or buy new clothes, etc. The main advantages of saving in cash are that cash is very portable, storable, not very visible and can be exchanged for almost anything. In view of these features, saving in cash is generally preferred. The main weakness of keeping cash is that it can lose its value during high inflation. That’s why many choose a mixed strategy of saving in kind and in cash.
• At home or in a bank: Saving at home has its benefits. The savings are nearby and easily accessed, but this means that it is also more easily accessed by other family members or can be easily stolen.

Saving at a bank may be a safer option. The problem is that banks only accept cash savings, the cost of opening and maintaining a savings account can be quite high and there are few banks, if any, located in rural areas.

• By giving: People give gifts or offer services not just out of generosity, but also sometimes with the hope of receiving the favour back when needed.

A typical example would be volunteering to help a neighbour harvest his crop. By doing this, you expect him to help you when it comes time to harvest your crop.

What about borrowing?

On the surface, using someone else’s money and then paying it back, later, seems easier than saving. Borrowing doesn’t require any immediate sacrifice. You get the money quickly and don’t have to worry about paying it back until later. But is it really easier than saving?

• Borrowing can be expensive: The borrower will have to pay back the loan itself, plus pay additional interest on the amount received. This can get expensive! There can also be “hidden” interests. For example, a shopkeeper may lend a person money without charging interest directly on the loan, but instead increase the price of the items the borrower must buy from him (medicines, food, other household items).

• Borrowing can be risky: Since the poor are more exposed to risks caused by weather, income fluctuations, diseases, theft and death, they may have repayment problems. Suppose that after borrowing some money a family member becomes ill. The money may then have to be spent on medicine rather than on the planned investment. This will make repayment difficult and worsen their situation.

• Borrowing can be difficult: For the above reasons, the poor may also have more difficulties in obtaining loans than would the rich. Lenders, whether a friend, a local moneylender or a bank, are unlikely to lend to people they think will have problems in repaying.

• Borrowing can be stressful: A loan involves a promise to repay the lender. Normally the full amount must be repaid within a fixed period of time, often with interest. Failure to repay may mean losing valuable possessions (jewellery, a cow, a plot of land, etc.) or one’s good reputation, being threatened and/or becoming more indebted by building up fines and interest payments.

How can the poor save more?

The poor do save. It may be just a few bags of rice, sorghum or maize, money to pay for school fees, but they usually save something. However, they have difficulties in becoming better off since they face a lot of problems. By adopting group saving approaches they can overcome some of these problems.

Let’s see how.

• The poor can save only small amounts individually, which are usually not enough to invest in productive resources.

» By saving as a group, the poor can accumulate a larger amount of money more quickly by pooling their savings in a common fund which can then be used by the group or a member of the group for productive investment.

• Low level of literacy and numeracy skills make it difficult for the poor to keep track of their savings and to manage their money.

  » By saving as a group, the poor can help each other learn these skills. As a group, they can more easily receive literacy and money management training from group promoters or trainers from NGOs, and also learn from other more literate members.

• More vulnerability to risks like bad harvest, food shortage, sickness, flood, income shortage, etc.

  » By saving as a group, these risks can be shared between the members. Individual members can rely on other members for help in time of need. Group savings can be used like an insurance scheme to help members deal with these emergencies when they arise.

• No access to safe saving facilities, such as banks.

  » By saving as a group, the poor can create a safe place to put their money. Some group saving methods do not require storing at all, since the money is immediately redistributed after collection. The group can also buy or make a cash box that will be safeguarded by several members.

• Social values which expect individual savings to be redistributed to the extended family and regard individual accumulation of resources as selfish behaviour.

  » By saving as a group, the poor can protect themselves from accusations of being selfish, since the savings belong to many individuals, not just one. The threat against a single member of the group is a threat against all members.

CHAPTER 2: Getting started

When looking into starting a saving activity with a group, first find out how people in the village manage their money and other productive and social resources. If you are an external facilitator, one of your most important tasks will be to gain acceptance by the village.

This can take a long time, but it is important that you obtain the support of the village leader(s) and villagers themselves. Work to gain their trust by talking with them regularly. Listen and show respect. You can prepare yourself by gathering information about the village from the local district office, non-governmental organizations (NGOs) and local leaders.

Group formation^[1]

• Identify the poor: Use your own knowledge together with suggestions from villagers to identify the poorer men and women. In a rural community, often, you will find three broad wealth categories: the big farmers, with land and access to development services, the middle farmers, with sufficient resources to meet their basic needs, and the poor, who live at subsistence level. Remember that identifying and assisting the poor is a sensitive issue. People may not like to be identified as poor, just like the better-off may not want to be identified as rich for fear of being left out of possible assistance. You can get information on socio-economic differences through informal interviews or by doing a wealth ranking if necessary.

See the section on Wealth Ranking in Chapter 4.

• Discuss group formation: Identify poor members of the village who are interested in working in a group. Organize one or more meetings with them to discuss their situation and financial needs and explain what you can do to assist them. It is best to keep the meeting small. A group of 8 to 15 people is ideal, since it allows for more open face-to-face discussions. If the group is too big, form sub-groups with people who have common interests. Large meetings tend to be less effective, since opinions and interests are more diverse which makes reaching agreement more difficult.

• Identify a clear development goal: Help the group express their goals and expectations clearly. People usually express their goals in general terms, such as “to generate income for the family”. It is important to establish realistic goals with specific actions. Let the group express their goals and discuss whether they are clear or vague. For example, “I want to improve my children’s education” is vague. “I want to buy school books and uniforms for my children for the next school year” is clearer.

See below for keys to success.

• Discuss saving: Discuss how they intend to achieve their goals through saving. What are the advantages and disadvantages of saving? Illustrate your discussion with real stories of successful or failed savings groups. Do they know of any similar stories? How do people save? What are some traditional saving methods? How do people deal with emergencies? Discuss the different factors enabling and constraining saving in the community.

Factors enabling or constraining saving

The success of any group saving activity will depend on a number of conditions that may either promote or discourage these approaches. Therefore it is important to know what they are and design a saving activity adapted to the local environment. Careful assessment of the local conditions as well as the skills and resources of group members (existing or potential) should be made. Some of these factors include:

• Use of cash: The more cash that is in circulation in the community, the more likely saving in cash will be useful. Although this manual focuses on saving in cash, saving in kind (livestock, grain, jewellery) can also be important. Many find, for example, saving in livestock (cattle, goats, sheep, poultry) a better store of value since the livestock produce offspring and/or by-products (meat, hides, wool, eggs) which add value and can be converted back into cash when needed.

The main problems with in-kind savings are that they are not as portable as cash; they are more visible and more difficult to hide from needy friends and relatives; and they may be more subject to diseases as well as to theft. This type of saving requires good knowledge of taking care of livestock and/or storing grains, etc. How useful would saving in cash be for the group members?

• Access to banking services: Banks are usually safe places to store money but few are located in rural areas, they often have expensive service fees and very few are interested in providing services to small savers. This may make saving in a group the next best option for safekeeping one’s money.

As the group and its savings fund grow, it may need to purchase a cash box or a safe to safely store its cash. The group or individual members may eventually also consider linking-up with a nearby credit union or a bank.

See section on linking-up with banks in Chapter 3.

• Inflation: Rapidly rising prices decrease the value of the money you save. In other words, as prices continue to rise you find that your cash savings can buy less and less goods. Inflation may discourage people from saving in cash. If prices are rising, saving in kind may be a better option.

• Social and economic differences: Friends and neighbours, people of the same ethnic background, gender, age group, religious or social group, or those with similar incomes and expenses may be more inclined to form a savings group than those who have little in common. That’s because they trust each other or have similar potential to save. Forming a savings group with persons of very different backgrounds may be much more difficult and is not encouraged.

See Chapter 4 for tools on getting to know the village.

• Traditional saving practices and social values: In some societies, failure to share one’s own resources with friends and family can result in being called selfish or even a witch, and these attitudes may discourage saving. What are the different ways people save in the village and which ways are preferred and why? What are the traditional values associated with saving? Do they encourage or discourage saving? If you are able to accumulate money or resources, are you considered as being selfish, and as taking money from someone else? Do people become jealous? Would saving in a group help one avoid these accusations?

• Gender: In most cultures, forming mixed savings groups with male and female members is accepted. However, in some mixed groups, men can dominate decision-making and leadership positions, leaving women members few opportunities to develop and acquire leadership skills or benefit from common resources. Women savings groups can create a legitimate opportunity for women to meet and work together, and gain leadership skills. Separate groups of men and women can be practical as long as both sides are aware of each other’s opinions and activities and do not enter into conflict with each other. Raising awareness about gender issues with men is as equally important as empowering women.

• Investment opportunities: Raising funds to start a small enterprise, to purchase land, livestock or farming equipment, or simply to meet family food needs, are important saving objectives for many. Using one’s own savings for productive investments, as opposed to getting a loan from someone else, may take more time, but it is a safer way for the poor to escape the poverty trap. To succeed, their investments must be well-planned and profitable.

See Chapter 6 for tips on business planning.

• Existing groups: It is easier to organize group saving activities with an active self-help group rather than to start a new one. Promoting saving within a small group is also easier because members know and trust each other and learn more quickly. Record keeping is also less of a problem in smaller groups.

• Living nearby: People who live near each other are more likely to have similar problems and needs. They also tend to know more about each other and who is trustworthy and who is not. Also, the closer people live to each other, the easier it will be for them to meet on a regular basis.

• Education: Groups with higher literacy rates are better able to keep track of their savings, maintain good records of meetings, etc. Although some group saving methods require little record keeping, the group should continuously encourage members to improve their literacy and numeracy skills and their knowledge of the world around them.

See Chapter 5 for some tips on money management.

• Health: Diseases, such as HIV/AIDS, TB, malaria, and disabilities reduce a household’s capacity to save. These will affect a group’s saving capacity, when some members are no longer able to contribute their savings or when loans are not paid back. Groups should take careful measures to safeguard the savings of all members by helping members in those situations better manage their resources. For example, the group can start a savings fund that will help finance the healthcare or funeral costs associated with the illness. Funeral societies (savings groups providing funeral services to their members) are commonly found throughout the world.

Popular insurance: funeral funds (iddir) in Ethiopia[3] Groups of people come together on the basis of location, occupation, friendship or family ties. Each iddir sets its own rules and regulations but usually pays out for funeral expenses or financial assistance to families of the deceased, and sometimes to cover other costs, such as medical expenses and losses due to fire or theft. Originally burial societies, iddir have extended to provide a wide range of insurance services in urban Ethiopia.

• Institutions and policies: As long as saving groups operate informally and on a small scale, they can set their own rules and regulations. But as the group’s savings grow, it may want to open a bank account and this may require that the group be legally registered. Legal status may bring more opportunities, but may also come with more rules and regulations, hence less flexibility. Find out what process is involved to be registered, and what benefits or constraints are linked with this legal status.

Keys to success

What then, are the basic factors that can contribute to group saving success? There are some key elements which the group should have and these include:

• A common bond: The more similar each member’s interests, goals, backgrounds and incomes are, the less likely members are to get into conflicts and arguments and the more likely they are to make quicker decisions that satisfy most members’ concerns.

“Our Well-Being Depends on Others”[4] Founding members of this rotating susu club, or savings club, in Ghana had a common interest. These small businesswomen each suffered from frequent shortages of cash in running their businesses. By forming a susu club, each member received a lump sum of money in turn that enabled them to overcome these shortages. In addition, the club started to provide social services to its members, such as donations for funerals, marriage celebrations, and health care.

• A clear saving objective: Savings should be mobilized for productive uses (that will directly or indirectly increase members incomes and their ability to save). The group can choose a common goal, such as saving to buy fertilizer for all members, or each member of the group can choose his/her own savings objective, depending on his/her priority and capacity.

Miembeni Group: a savings club for wholesale purchase[5] Members of this farmers’ group in Tanzania cultivate their own plot of land but buy collectively their agricultural inputs. Every member contributes a standard amount per year into a group account and the group uses that money to buy their fertilizer at the wholesale price.

• Small groups: Successful saving groups tend to be small rather than large. The average size of successful self-help groups is between 8-15 members, but this number can vary. In smaller groups, there is more face-to-face contact, making trust-building among members easier, and decision-making and collective learning more efficient. Small size also means small mistakes. So start small and let the group grow as it gains more experience and when it is ready to do so.

• Discipline: Saving requires discipline since it means withholding something for future use instead of consuming it right away. All group members must have discipline and agree on a common set of rules to follow. If the rules are not enforced, then all members suffer. Groups solve this problem by using peer pressure or punishing those members who do not follow the agreed rules. This may include a fine for late payment or for missing a meeting, and even expulsion from the group.

Kiambu savings group in Kenya[6] “It is good to have the group to answer to if you do not set that money aside each week. Otherwise, if you were on your own, when business is bad you might decide not to save that week. (Our) group teaches us the profit of learning how to save money regularly.” - Mama Alice, member.

• Team spirit: Sometimes having a common interest and being disciplined are not enough. “Team spirit” is also needed. Good group leaders can develop this spirit, but it can also be strengthened by other means: by giving a special name to the group which all members can identify with or coming up with a group song. The group can also develop a simple list of principles all members agree are important and worth preserving.

• Trust: Group saving not only requires that all members adhere to and respect a set of rules but that they trust each other. If they don’t, benefits will quickly disappear. Trust is built by showing commitment and discipline. If a member fails to honour his/her commitment, then it should not be left unpunished. Rules that aren’t enforced are seldom obeyed.

Tips for group facilitators

As a group facilitator, your task is to help poor people mobilize more resources for productive use by promoting savings groups or helping existing groups set up saving activities. The ultimate goal is to help people better manage their own resources themselves to improve their lives.

Your assistance to groups may include:

• Visiting and talking to individual members and other people from the community;

• Attending group meetings;

• Visiting groups when they carry out their activities;

• Organizing workshops, training sessions and evaluations for group members;

• Following-up on items discussed in the meetings, workshops, training sessions and evaluations.

CHAPTER 3: Saving as a group

There are many ways to save in a group, but they tend to be variations of three basic forms. The simplest and most common form of savings group is called the Rotating Savings and Credit Association (ROSCA). A more flexible variation of this is called the Accumulating Savings and Credit Association (ASCA) and a more complex form, is the Credit Union or Savings and Credit Cooperative. This chapter describes each of these three main methods, what they are used for, what their advantages and disadvantages are, and how they operate. It concludes with a section on linking-up with banks.

The best advice in starting a group savings activity is to start on a small scale and keep it simple. If group members make mistakes, they will be little ones. As the group gains experience in money management, members may want to try out new, more flexible ways to meet their growing financial needs. The ROSCA method is the simplest form; it does not require much record keeping. It also usually serves a smaller group (8 to 15 members), although larger ROSCAs do exist. It is less flexible than an ASCA since individual members cannot withdraw their savings or take loans whenever they like. ASCAs offer more flexible savings and credit options to its members, but require more record keeping than ROSCAs. Credit Unions offer the widest range of services to their members and therefore require an even more complex record system. All these informal and semi-formal group saving methods have the potential of linking up with either other groups or to the formal financial system, such as banks, in order to have access to more flexible services.

At the start, keep things simple!

NOTE: Names of savings methods may be changed to make it easier for members to understand.

Rotating Savings and Credit Association (ROSCA)

The ROSCA is the most widely used methods of informal group savings around. Various types of ROSCAs exist in almost every developing country and go by different names: njangi (Cameroon), susu (Ghana), arisan (Indonesia), ekub (Ethiopia), upatu (Tanzania), tontines (West Africa), etc.

A ROSCA is commonly described simply as an informal association of participants who make regular contributions to a common fund which is given in whole or in part to each contributor in turn.

How a ROSCA works

Members of a ROSCA may meet every day, week or month and contribute a pre-determined sum at every meeting. At each meeting (or round), the money is collected and given to one member. Once a member has received the collected money (or lump sum), s/he must continue to contribute but will not receive the lump sum until all the members have had a chance to receive it once. When the last member has received the lump sum, the group may decide to start a new cycle. This way, ROSCAs serve both loan and savings needs.

The illustration below shows how a 5-person ROSCA would function. At each meeting, all members contribute an equal amount to make a “lump-sum” that is distributed at the end of the meeting. At the first meeting, Amita gets the lump sum. At the next meeting, Kofi receives it, and so on, until all members have received the lump sum once. This completes one cycle.

One cycle of a 5 member ROSCA

What it’s used for

• Meeting individual needs of members

• Access to lump sum cash for working capital

• Small investments

Advantages

• Simple rules and procedure

• No record keeping skills needed

• No external mediator (money lender) involved

• No storage facility needed as money is redistributed at the same time it is collected

Disadvantages

• Not much flexibility to meet immediate cash needs, since members receive the money in turns

• Risk of default by a member who receives the lump-sum early in the cycle

• Periodic and equal contributions require a regular income

• Members who receive their lump-sum towards the end of the cycle may benefit less than those who receive it earlier

Steps

1. Decide on what amount members can afford to contribute on a regular basis.

2. How often will the group meet? Usually it is daily or weekly. If the meetings are infrequent, it will take too long for the last persons to receive their collection. This would discourage members.

3. How will the collected funds be distributed? It can be done either by taking turns in a set order, by chance draws, or by bidding for it.

See section below on Lump sum distribution methods.

4. Decide on who will organize the meetings and where they will take place (member’s house, local community centre).

5. Who will keep the records? ROSCAs don’t normally require much record keeping since the money is redistributed as soon as it is collected, but some distribution methods may need record keeping.

See section below on Record keeping.

Lump sum distribution methods

The group can choose any distribution method it likes. Here are some suggestions:

1. Each member takes the lump sum in strict turn (by age, alphabetical order of name, etc.), which the group decides. One way is to give the money to the person who hosts the meeting. The next meeting, can be at another member’s house, etc.;

2. In order to compensate those members who received the lump sum at the end of the cycle, the group may decide to change the order of distribution, so that the last person in the first cycle will be the first to receive the lump sum in the second cycle, and that the first in the first round will be the last in this cycle. In the third cycle, members may decide to change the order again and so on;

3. The group picks a person randomly like in a lottery draw. The person who wins cannot participate in the next draw, but must continue to contribute until everyone has ‘won’ once;

4. Members decide to give it to the person they think needs the money most at the time of the meeting; or

5. The lump sum is sold to the member who is willing to pay the most for it. This is called an auction. The money gained from the auction is collected and redistributed equally to all the members at the end of the cycle.

See how an Auction ROSCA works below.

Record keeping

ROSCAs require very little, if any, record keeping. But it is always safe and useful to keep a record of the amounts collected, attendance at each meeting, and who received the lump sum on which date. In case there is a conflict between members regarding the procedure, or if the group decides to continue its activities, and begin another cycle, such records help everyone remember what was decided and agreed on at each meeting.

Here’s an example of a ROSCA record book (For simplification, this group has only 3 members and meets once per week):

NOTE: Currency symbols were left out. Adapt the example using local currency.

Key Questions

• How much will each member contribute?

• How often will the group meet?

• Who will receive the lump sum first?

• Who will receive the lump sum next?

• Where will the meeting take place?

Accumulative Savings and Credit Association (ASCA)

The ASCA method is a more flexible form of savings group, but it’s also a bit more complicated. In an ASCA, the contributions collected at each meeting are accumulated, rather than redistributed at the end of each meeting like in a ROSCA. With this accumulating fund, the group can do many things. It can lend to its members free of interest or with interest. Interest earned on loans can become income earned for savers, adding incentive for members to keep their savings with the group. This method can serve both savings and credit needs in a flexible way.

How an ASCA works

In an ASCA, members contribute a fixed sum at regular intervals (weekly or monthly) for a period of one year or more. After the group has saved enough money, say after 2 months, it can start giving out loans to members. The loans can be paid back in instalments, or in whole, free-of-charge, or with an additional interest charge.

Charging interest on loans generates additional income which can be used to help the group savings fund grow, to cover any costs in running the group, and/or to pay members an income on their savings.

The group can also decide to accept regular or irregular contributions of equal or unequal amounts from members, to keep the fund with the group or in a bank account, to lend the money to more than one member and charge interest on it, and a combination of these.

The group will have to decide on which way it will run its ASCA to satisfy the needs and capacities of its members.

What it’s used for

• Expected expenses (marriage, education, health care)

• Unexpected emergencies (death, accident, fire)

• Investments (buying a cow, starting a small enterprise)

Advantages

• Interest earned on savings can be used to fulfil individual and/or group interests

• Larger amount of savings can be accumulated overtime

• More flexible individual savings and loans options than ROSCAs

Disadvantages

• Management and record keeping skills needed

• Risk of default by a borrower

• Safekeeping of funds required (in a cash box or a bank account)

Steps

1. Decide on how often the group will meet.

2. How much can each member contribute at every meeting? Will every member contribute the same amount or different amounts?

3. Agree on a set of rules and regulations to ensure discipline and trust. For example, fines for missing a meeting or late payment of contribution or loan, and expulsion from the group for more serious misbehaviour.

4. Decide on who will be the leaders and for how long. Leaders can consist of a chairperson to facilitate the meetings, a secretary to keep minutes of the meetings and records on the transactions, and a treasurer to keep the money. It is highly advisable to divide these duties to increase transparency and avoid mismanagement of the funds.

5. Find a safe place to keep the money, either in a bank or in a cash box. One way to safeguard the savings is for one trusted member to keep the box, while another trusted member keeps the key. Another way is to put two locks on the cash box and have each key kept by a different member. This provides some protection against temptation overcoming one person.

6. Decide on how long the group will save before starting to give out loans. Never lend out all the accumulated savings to one person only. Remember, the money belongs to all members of the group. Minimize the risk of loss, and always keep some money in reserve.

See below for some rules-of-thumb on lending.

7. Decide on the conditions members must meet to receive loans and the terms of repayment. The size of the loan should be limited to a proportion of the total amount saved by the borrower. Each borrower should present one or two members with savings to stand as guarantors in case the borrower cannot pay back. If loans are not repaid on time, a fine should be charged.

8. Close accounts periodically, say at the end of each year, and return the savings to the members. This step helps ensure transparency and members trust that their money has been properly handled.

Record keeping

An ASCA requires very careful record keeping. Here’s an example of record keeping for a group (for simplicity, this group has only 3 members) that meets once a week and each member contributes 10 weekly. The group has a savings book indicating the date of the meeting, names of the members (1st column), individual member’s deposit for that meeting (2nd column) and each member’s total savings (3rd column).

The Starting Balance shows the group’s total savings at the start of the meeting. The Ending Balance shows the group’s total savings at the end of the meeting, after deposits have been collected.

Example of records for two meetings on a savings book

At the 10th meeting, the group has accumulated 300. Kofi asks the group for a loan of 120 to start a small fish trading business, which he is given. But he must still continue to meet his weekly contribution and pay back the loan with the interest set by the group. A separate record book should be kept for loans. In this example, the loan book has separate records for each borrower, indicating the amount borrowed and the terms of payment on a loan contract and a record tracking the repayment on a payment plan.

Here’s an example of a simple loan contract and payment plan:

Example of a Loan contract

Example of a payment plan and tracking record

At the end of each meeting, the group should count how much cash they have in-hand and make sure that the amount matches the records. Everyone should participate, not just the treasurer, so that transparency is ensured.

Example of a savings and loans balance record

----- records not shown for meetings held between these dates.

Credit Union (Savings and Credit Cooperative)

A credit union operates like an ASCA but serves a much larger membership (from a low of 100 to several thousands) and offers a wider range of savings and credit services to its members. Credit unions are usually chartered under a cooperative or credit union law of the respective country. Their status must be approved by the agency that regulates credit unions in order to be operational. Credit union funds are also normally kept in a bank for safekeeping.

Members are free to come to the credit union office anytime during office hours, and no regular attendance of meeting is required. They can operate individual accounts, make saving deposits and withdrawals, earn an interest (called ‘a dividend’) on their savings and pay interest on loans they take from the credit union.

How a credit union works

A credit union uses member savings deposits to fund loans to members and pays savers a dividend for the use of their money. This payment provides an incentive to save more. Members who take a loan from the funds pay interest for the use of the money.

This interest is the credit union’s main source of income. The total income must be enough to cover the dividends paid to savers, the credit union’s operating expenses, and still have something left for additional services to members.

• Member shares: To become a member of the credit union, each person is required to purchase at least one member share. A member share is like a certificate of ownership in the credit union and can be resold when leaving the credit union. The purchase value of the member share is set by the credit union and is the same for all members. The money raised in this way becomes the initial pool of savings the credit union uses to provide loans to members.

• Individual savings accounts: Most credit unions offer individual savings accounts. This allows each member to deposit any amount of savings into his/her account and withdraw it when s/he wishes. Members find this saving service much more attractive than purchasing more shares since it gives them a safe place to save their surplus cash and withdraw it when they need to.

• Certificates of deposit: Some credit unions offer a special savings contract where the member agrees to keep his/her savings in the credit union for a fixed period of time, say one year, without touching any of the savings until after that time. The credit union normally pays the member a higher dividend than on his/her member shares or individual savings account balance.

What it’s used for

• Serving a larger membership

• Providing more individualized savings and credit services

• Serving clients normally not reached by local commercial banks

Advantages

• Larger membership means a bigger pool of funds for lending to members

• Savings are voluntary, not compulsory

• More individualized savings and credit options for members

• Interest earned on savings. Members may also receive an extra dividend at the end of the year if the credit union makes a surplus that year.

• Safe deposit facilities

Disadvantages

• Larger pool of funds requires more secure storage

• Individualized accounts and larger membership require more complex accounting system

• No close collective monitoring of transactions can create opportunities for favouritism

Steps

1. Identify a group with some common bond. Members of a credit union usually have the same employer or employment, belong to the same church, or live in the same village, etc.

2. Form an organizing committee. The committee’s first job is to find out what is required to obtain legal approval and to prepare a business plan. The business plan should include an analysis of the environment in which the credit union will operate, short and long-term goals and planned activities to achieve them.

3. The group members vote on a set of rules to adopt. Application form and fee, bylaws, elected members’ statement of worthiness to serve, deposit pledges, and business plan. The credit union cannot begin official operations until it is given legal status by the agency that regulates credit unions.

4. Members elect a board and other required committees. The Board of Directors is composed of a President, Secretary and Treasurer and several member representatives. The Board supervises the management of the credit union, approves member loan applications and may select and hire a full-time manager, if necessary.

5. Each member must purchase a member share at a fixed price. The money collected from these share purchases is then used to provide loans to members.

6. Member loan requests are first reviewed by a credit union committee composed of other members to ensure the loan will be paid back. The borrower is also required to pay interest to the credit union which is based on a percentage of the amount of the loan.

7. When the loan is repaid, an additional interest charge is paid by the borrower to the credit union. This interest is then used to cover any operating expenses of the credit union. If anything is left over a dividend is paid to members in proportion to the shares they have in the credit union.

Record keeping

Since credit unions serve a large number of members and provide more individualized services to them, their record systems are more complicated than for a small savings group. Every credit union must have a system for accurately recording all money transactions, including each member’s deposits, withdrawals, loan advances and payments. It must also record other receipts and payments that the credit union makes in the course of doing business. The basic record books for all credit unions are similar and usually include:

• A cash book: This is the main transaction book of the credit union which keeps track of all cash transactions of all members as well as other credit union business transactions.

• A member passbook: This book serves a dual purpose: (1) as the member’s personal identification card, since it contains basic information on each member (an identification number, the member’s full name and address, etc.) and (2) as a personal receipt or voucher book. When members come to the credit union, they bring their passbook, the treasurer of the credit union then records the date and amount of the transaction made and signs the member passbook to verify that the money has been paid or received by the member.

• The member card: Once the member transaction is recorded in the cash book and member passbook, the Treasurer makes a similar entry on a card containing all savings and loans transactions related to that particular member. When a member applies for a loan, the loan committee reviews the information on the loan applicant’s member card to determine his/her credit worthiness.

• The general ledger: This record contains information on all the more detailed accounts of the credit union and is used in preparing the Balance Sheet and Income Statement of the credit union.

Key Questions

• Do you have enough members with a common bond?

• How important is security of savings?

• How easily do you want to make deposits and withdrawals of your savings?

• How much dividend do you want to earn on your savings?

• How will you safely store the money?

NOTE: For more information on starting a credit union, consult the Credit Union Handbook, visit an active credit union or a credit union federation in your country, or contact the World Council of Credit Unions^[12]. You may like to consider joining an existing credit union before starting one.

Linking-up with banks and other financial institutions

Many individual small savers like group saving approaches because they are a more secure way to save. As the group savings grow, the group or its individual members may find advantages in linking-up with other financial institutions or with a bank. For example, a savings group which has mobilized a large savings fund might find it beneficial to open a group account in a local bank to safely store its surplus funds, or to access loans.

Away from the pressure of demanding friends and relatives, they can better manage their resources, plan for their expenditures, and access a larger pool of saved funds to help finance various social and economic needs. By working together as a group, they can also learn and obtain information and advice from each other.

Linking-up or not linking up?

Some of the benefits savings groups seek in linking-up with banks include:

• Safety: The first priority of most groups is having a secure place to store their savings. As amounts saved get larger, the security of member savings becomes even more important. Holding surplus funds in a bank guarantees greater security against theft.

  

• Convenience: The bank should be close by and the bank’s office hours convenient.

• Easy deposits and withdrawals: Savings groups also want to be able to make frequent deposits and withdrawals, and to have access to loans which can supplement group funds during periods of high loan demands, for example at harvest time.

• Interest income: Banks normally pay savers interest on their savings to reward them for entrusting their money with the bank. While evidence shows that earning interest income is not the number one concern of savings groups-the safety of their savings being more important-the additional income helps their savings grow and provides an incentive to save more.

But linking-up with banks is not always that easy:

• No banks nearby: Most people living in rural areas do not have easy access to banking facilities. Linking-up can become costly (transportation fees, transaction fees, etc.) for the group. In many cases, it is simply impossible for certain economic groups to open a bank account, as they do not meet the minimum requirements.

• Bank regulations: Large deposits to open a savings account or a high minimum balance may be required to hold an account with a bank. They may also charge a monthly fee for maintaining the account, or may require advanced notice for withdrawal of savings. Groups may also be required to be legally registered in order to open a group account.

• Difficult access to bank loans: The bank may require that the borrower maintains a minimum balance of savings over a longer period of time as a prerequisite, and pledge additional collateral. The process of applying for a loan may be time consuming and complicated.

• Banks not interested: Since the administrative costs of maintaining small savings accounts is the same as for maintaining larger savings accounts, banks are not very interested in serving small savers.

NOTE: Some banks reduce these costs by allowing small savers to open group accounts. This allows individual small savers to pool their savings in a single larger account and leaves much of the account handling costs up to the group rather than the bank. Since small savers are much more interested in the safekeeping of their funds and easy access to them, they are also often willing to pay more for that service.

Linking-up with credit unions

Linking-up with a credit union may be easier than linking-up with a bank. The rules and regulations of credit unions are usually much more flexible and their staff more accustomed to working with small savers.

Credit union members generally share some common bond. For example, they work for the same organization, go to the same church, or live in the same village. Many of them work in the same company, but others are village-based and allow for more diverse memberships, including groups.

Some credit unions are also linked to larger national credit union federations which can provide additional technical assistance and financial support. Other micro-finance organizations or savings clubs may also operate in the area. If so, they should also be explored.