Across Africa, millions of people use and trust savings groups and other informal savings mechanisms (ISMs). They provide financial services that formal financial services providers (FSPs) often can’t. Savings at the Frontier (SatF) is a multi-year partnership between Mastercard Foundation and Oxford Policy Management to help FSPs find ways to link with ISMs, benefitting both service providers and savings group members.
In this blog, Steve Peachey of Oxford Policy Management explains how the SatF programme is bridging the gap between its demand-side analysis of what savings group members want from banks or other FSPs, and the requirements of FSPs who are interested in the group members as a potential extension of their existing client bases.
Any financial service provider looking at moving into an untapped market by linking up with informal savings mechanism (ISMs) needs to answer three basic questions:
- What am I being asked to link with?
- What kind of customers will ISMs bring? And;
- What kind of business will those customers bring?
To help with the first of these questions, the Savings at the Frontier project has developed a typology of ISMs. To begin with is the well-publicised end of the market: community or village-based savings and loan groups that are facilitated by NGOs, an area where the Mastercard Foundation has been very active.
These mechanisms have their own specific features and a variety of names. They also share common features that include:
- regular (often weekly) saving;
- a strong element of social pressure to keep that saving going;
- an ability for savers to borrow short-term from the accumulating pool of savings;
- quite high rates of interest; and
- at the end of an agreed period, all savings plus accumulated interest is distributed to group members.
We know, however, that this portion of the market is only the small tip of a much bigger and centuries-old, self-organised phenomenon.
In each of the SatF focus countries (Ghana, Tanzania, and Zambia), we looked for other ISM types and can now describe the different ways that these deliver the same outcomes.
To answer the second question, we make estimates of how many more potential clients the financial services industry might expect through linking to ISMs, relative to the population it already serves. We use World Bank Global Financial Inclusion Database (Findex) microdata to look at whether people have an active relationship with formal FSPs and whether they save informally outside the home with ISMs, as opposed to just saving and borrowing within a family context or living day by day, spending cash as it comes in.
The segmentation we create allows us to look at the overlaps between different types of formal and informal mechanisms. The results are powerful and of interest to FSPs. We will be describing our findings for each country in later blogs in this series.
A variety of scenarios
In general, we find that people using ISMs come from across the socio-economic spectrum. In two countries (Ghana and Zambia) the new customers that linkage could bring to formal FSPs will come from the mass middle market. In the third country (Tanzania), we are asking FSPs to think about serving a new, much lower-income customer base.
These findings enable us to provide financial service providers with indicative answers to the second and third questions although more work needs to be done by FSPs themselves. This is why SatF is funding a short list of FSPs to research and pilot evidence-based business plans for possible larger projects under Savings at the Frontier.
The challenge now will be to help these FSPs turn interesting ideas into projects that can close five key gaps that must be bridged if we are going to find scalable commercial models that work for FSPs, ISMs and users alike:
- the mindset gap that exists between the way group members, especially members of NGO-facilitated groups, think finance can work for them and how FSPs think people should expect finance to work for them;
- the affordability gap that can arise because ISM users may have different income and expenditure profiles from those who have so far been reached by formal finance (although our research suggests this gap may not be as wide as initially expected);
- the proximity gap that comes when the access points that allow dematerialised money (in accounts or e-wallets) to be swapped for cash or vice-versa are just too far from the places where many ISMs operate (and this still looks to be a big issue in all three countries);
- the digital gap that comes when basic mobile money services have too low a penetration for people traditionally operating in the cash economy to feel comfortable swapping visible cash-based financial mechanisms for dematerialised formal alternatives; and
- the capacity gap that comes with, on one hand, FSPs having limited IT, digital and physical capacity and skills to deal with large number of small-value transactions and, on the other hand, customer capacities to understand and respond to language, products, and working methods of FSPs.
Only FSPs can frame and answer the questions that will determine whether they see a viable business case for them to move into linkage in a serious way. We look forward to seeing how they do.
Steve Peachey is the Technical Lead (institutions) on the Savings at the Frontier programme. A former central bank economist with additional commercial banking experience, he has nearly 25 years’ experience working with central banks and both state-owned and private commercial banks in transition economies and now increasingly in African and Asian developing countries.
Savings at the Frontier is a $17.6 million partnership between Oxford Policy Management and the Mastercard Foundation. For more information, please visit http://www.opml.co.uk/projects/savings-frontier