FinDev Blog

Sharing the Risk: “Micro Equity” for Savings Groups

How DreamStart Labs is re-thinking assumptions about how to design solutions for people in emerging economies
Three women smiling and looking at phones, in a savings group in Rwanda.

Many development interventions work on the assumption that people in developing countries are in control of their lives and only need better information, technology, tools, infrastructure or access to finance to improve their lives further.

But what if this assumption is wrong? What if the defining feature of many emerging markets is precisely the fact that individuals have far less control over outcomes than those of us lucky enough to live in more established economies? Twitter logo And how might we re-think our interventions if we were to design services with this in mind?

At DreamStart Labs Inc., we faced a challenge recently that led us to ask these questions and think differently about how to provide services for low-income people in emerging markets that both meets their needs and protects them from risks beyond their control.  

The challenge: Limited funds available in Savings Groups

DreamStart Labs Inc. is a fintech that provides digital solutions for Savings Groups, which are informal community banks whose members come together to save and lend money to each other.  Each group agrees to operate over a fixed number of meetings (the “Savings Cycle”) and to hand back savings and a share of profit to each member on a pre-agreed date (the “share-out” date). The following month, the group starts over again on a new Savings Cycle.

Savings Groups are the primary source of financial services for hundreds of millions of unbanked people around the world. While they are extremely successful, one key limitation is that funds available for lending are self-generated and therefore limited.

Furthermore, because community banks distribute their savings and interest to members at a set date, the total is reset to zero at the end of each Savings Cycle.  A group begins each new Savings Cycle with no funds to lend so members must either wait until sufficient funds have accumulated or go elsewhere. Neither is optimal and both take time.  

External loans provide a solution, but can put more risk on clients

One solution is to link Savings Groups to external lenders.  As Savings Groups use our DreamSave app, for example, they build data-driven credit scores that give them unprecedented leverage with formal financial institutions. For the first time, unbanked members can access external loans at fair rates – even if they live in a rural village miles from the nearest bank.

But while external loans can be a great solution for many members, there is still an important gap. In many cases, members have very little buffer in case they cannot repay an external loan. This is especially true in agricultural economies where income cycles may not match traditional loan repayment terms. For these members, external loans bring added risk.

The question is: Who bears the risk?

To provide the right solution to this problem, we needed to build on two key facts:

  1. Clients in developing markets are highly exposed to external risks.
  2. The capacity of clients to absorb risk falls the further you go down the income scale, putting the poorest at greatest risk of failure.

With this in mind, offering only traditional loans did not feel right, nor fair. For already vulnerable members, this would effectively be asking them to absorb all the risk of loan repayment.  

We realized that we needed to introduce a new type of product that recognized risk and, specifically, changed how risk is distributed. We needed to move beyond a complete transfer of risk to the group and to put ourselves at risk, such that our incentive for success – and risk of failure – would be aligned with every other member.

Our solution: “Micro Equity”

Our solution was to design a new risk-sharing “Micro Equity” investment product to deal with the lack of funds in the early part of the savings cycle.

The way it works is this: In agreement with the members, DreamStart Labs joins as an ordinary member and contributes a lump sum upfront and/or invests regularly in the Savings Group like any other member.

By contributing as a member, we increase the funds available so Groups can lend earlier, in higher amounts or to more members. We also share the risk of losing all or part of our savings should the group fail.  On the other hand, if the group completes the cycle and shares out earnings, we realize our portion of the profits. In short, if the group wins, we win. If it loses, we lose.

The results: Testing Micro Equity in Rwanda

To test this idea, we conducted a pilot of a Micro Equity product in Rwanda with 16 groups who currently use our app. After concluding the full 12-month savings cycle, we found that, compared to the previous cycle:

  1. The Micro Equity pilot groups increased savings by 65 percent on average.
  2. The value of internal loans increased by an average of 110 percent.
  3. The number of loan transactions increased by 28 percent on average.

We also surveyed the pilot groups as soon as the pilot was complete to ask about their experience with the Micro Equity product. The survey revealed that:

  1. All groups really liked the product.
  2. Every group repaid the Micro Equity investment at the time of share-out as agreed.
  3. The groups wanted us to continue with the product.

The most striking finding from the survey was the overwhelming preference of all the groups for Micro Equity versus an external loan. The reasons the groups preferred the Micro Equity option were flexibility and trust. 

In terms of flexibility, the members appreciated the fact that Micro Equity allowed extra time to use the investment (i.e. until the end of the 12-month Savings Cycle)  as compared to an external loan and that it reduced the stress of meeting the series of fixed repayment dates required by external lenders.

The second reason to prefer Micro Equity was, as one member said, “We trust you more.” Members know DreamSave, while banks and MFIs, for most members, are distant and relatively unknown. So it makes sense that members are more comfortable dealing with us. When that trust was backed up by the creation and delivery of a service that groups loved, it proved to be a winning combination.

What next?

The participating groups in Rwanda are enthusiastic about continuing with Micro Equity into their next savings cycle. We have also decided to extend the pilot to see if Micro Equity has the same appeal in other countries in Africa as well as, for the first time, a country in Asia.

If this extension proves successful, our plan is to offer Micro Equity investment to groups worldwide. To ensure scalability, we plan to automate the service through an in-app “Avatar” who, with the group’s consent, will join the group as would a physical member. An AI-driven “Avatar” service delivered as an automated feature means we can deliver investment at scale across DreamStart Labs Inc.’s thousands of groups across the world.

Conclusion: Can risk-sharing be applied more widely?

Shared goals involve shared risk, and there are factors outside of all of our control for which no one partner can be held responsible.  Twitter logo

In trying to meet the investment needs of our Savings Group clients, our goal was to avoid solutions which might make clients worse off by insisting that they carry the risk of investment failure. Twitter logo We had to think differently to come up with a product that aligned our incentives for success with that of the group.

We believe we found an answer to more equitable risk sharing in Micro Equity - an investment by us in the group where we share the fruits of success and the risk of failure as equal partners. Not only has this approach proved very popular with groups, but we think it can be applied more widely. Our hunch is that there are many other opportunities to rethink solutions by looking again at how risk is distributed, perhaps to the benefit of clients and development organizations alike.

Infographic on Micro Equity for Digital Savings Groups

Comments

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Olabiyi O D , Nigeria
08 August 2022

Hi, Philip. When would your product come to Nigeria?

I would like you to reach me about whatever you are thinking about Nigeria

Philip Acton , DreamStart Labs Inc., UK
09 August 2022

Hi there,
Please contact me at [email protected] to discuss. Thank you.

Jeffrey Ashe , Director Grassroots Finance Action (grassrootsfinanceaction.org), USA
12 July 2022

As I understand it, the group receives a micro equity grant and adds it to the savings mobilized by the group and repays the micro-equity contribution when the fund is divided at the end of the yearlong cycle. This deals with the issue that if the fund is divided at the end of the cycle the group needs to wait for a month or two to mobilize enough savings to make loans. Savings groups routinely take care of this issue by not distributing some or all of the group fund, so that the group can make loans immediately. As the loan pool continues to grow the group can make larger loans.  For example, most of the fifty savings groups in Guatemala we are working are holding back distributing at least part of the loan fund.  This is a common strategy among the million or so savings groups worldwide. How much does the group pay for the micro equity grant? If the group does not repay the micro equity investmen, what are the consequences for the group?

Philip Acton , DreamStart Labs Inc., UK
13 July 2022

Hi Jeff, Thank you for your comment. To get straight to your two questions: (1) Given that we come into the Group as a member, we receive the same return on our investment/savings as other members. As you know, this is not predetermined so we take the same risk on return as other members do, and (2) We are able to Credit Score groups using their member, savings and lending histories, so we do not invest in all groups automatically. Having said that, if a group fails - or chooses not - to repay, we lose our investment. We do not take security, so the risk of loss is entirely with us.

Jeffrey Ashe , Director, Grassroots Finance Action (grassrootsfinanceaction.org), and Columbia University , USA
13 July 2022

Hi Philip, Thanks for the clarification. What you have come up with is an innovative approach for adding to the liquidity of savings groups. This is a real improvement over linking savings groups to loans from banks which is being promoted in Africa now, the NABARD Self-Help Group Bank Linkage initiative in India and Finca's early work that linked village banks to a line of credit. All of these are loan programs with all the difficulties this leads to and the completely distinct motivation of lenders who want to make money and the needs of the village women who make up most of the members of these groups. I was Oxfam America's Director of Community Finance and the twenty-five local organizations we partnered with in Mali, Senegal, Cambodia, El Salvador and Guatemala might be interested in your product.

Philip Acton , DreamStart Labs Inc., UK
20 July 2022

Hi Jeff, Thanks again for your comments. In terms of potentially reaching out to the local organisations in the countries you mention, can I suggest that you contact our CEO, Wes Wasson, at [email protected] to discuss? He is aware of our exchange, and has read your great book - as have I!

Ekalale Patrick , DANCHURCHAID, Kenya
27 June 2022

THis is a super great article, very insightful and eye opening on most VSLA scenarios.
I'm working with VSLA groups in Kenya under DanChurchAid Kenya country office. I would like to be linked with the Dream save App as the 'Micro Equity' product sounds wonderful and we like our groups to benefit as well.
Thank you, looking forward to hear from Dreamsave team.

Philip Acton , DreamStart Labs Inc., UK
13 July 2022

Hi Ekalale Patrick,
Thank you for your comment. Please email me at [email protected] and I can connect you to our country representative in Kenya. I look forward to your message.

Misha Sharma , Dvara Research, India
15 June 2022

Hi Philip. Thanks for the post. Quick question- How are the savings being digitised? Yes, the savings contribution by each member is recorded on the app, but how is the savings in the form of cash being converted into digital savings? Are group members depositing their money in the bank account and then linking their bank account with their dream-savings account? Or is there an agent who is depositing all the cash into the bank? Is there any kind of partnership between Dreamsave and the local banking institutions?

Philip Acton , DreamStart Labs Inc., UK
16 June 2022

Hi Misha,

For Rwanda, we have a digital wallet integrated with the App and the Group and members have a wallet. In other countries, we are working on integrating a Group wallet either within country or cross-border. If not yet integrated, we work with our partner's agents and branch network to distribute the investment. So we make it work either way.

Ruth Hoffman , Canada
30 May 2022

Greetings. Congratulations on your work. I’ve seen this work well in Uganda too. I’m always curious why there has to be a 100% shareout?

Philip Acton , DreamStart Labs Inc., UK
31 May 2022

Hi Ruth, Great question. As you're probably aware, the share out is effectively an "action audit" which means it acts as proof that the Savings Group is working as it should. If that is not the case, then members can choose not to join the next cycle or go to another group without stigma. Also we find that members have earmarked these funds for a specific use and, having waited for up to 11 months through the Savings Cycle, are anxious to deploy all of their funds towards that goal.

Ruth Hoffman , Canada
01 June 2022

Thanks Philip. I agree there should be mechanisms for allowing members to leave and join. At year end there could be an allocation of 'interest earned' during the year but I'm wondering if that needs to be tied to a disbursement of funds. There are different goals to savings to be sure - school fees due in January could be one. I've worked with savings groups which removed the year end disbursement and it seemed to work well.

Christian Loupeda , Technical assistance provider - financial inclusion , Benin
12 May 2022

Great initiative to address the issue of low capital available for lending that limits the growth of savings groups. A couple of questions:
- Have you monitored the evolution of average individual savings amount? My fear is the infusion of external funding kills the motivation of members to continue to save. As we all know, no saving means no more savings group...
- Also there is a risk of discouraging members attendance to meetings as the main objective of group meetings attendance is to bring their savings. Again no attendance to meetings means no group.
Thanks for sharing your experience.

Philip Acton , DreamStart Labs Inc., UK
16 May 2022

Thanks for the questions Christian. In answer to the first, we did not observe a fall off in individual contributions. As a member, we limited ourselves to the maximum that any one member can save under the Group constitution. We rolled this up to 'front load' the injection of capital to make it more useful. But - critical point - this amount was not so big as to discourage members from saving. In answer to the second, we saw no drop off in attendance. In fact, members were more likely to show up early in the cycle because - thanks to our up-front contribution - there was a greater chance of funding being available to meet their internal loan requests.

Saïbou Noumonvi , TECHNOSERVE, Benin
19 May 2022

Hello Philip. It is exciting to lean DreamStart Labs came up with this initiative. in Benin, some savings groups already got loans from FIs at the beginning of the cycle and this did not break th groups dynamics. And that is a good point that the micro equity is operating following the group constitution. Does this mean that the amount that DreamStart Labs injects upfront is just one cycle savings any one member can save at the end of the cycle ?
If so, my fear is that DreamStart Labs will earn the maximum of the profit. What were the feeling of other members of the groups at the time of shareout?
And at the same time, the micro equity amount won't be enough for those groups that are already benefitting more important funds from from FIs. Thanks
Thanks

Kellie McDaniel , Episcopal Relief & Development, United States
17 June 2022

Hello Philip,
Really interesting and creative innovation around distributing risk. I have a related, but different, question regarding the savings and individuals contributions. Can you confirm that when you say savings you are referring to the payout which includes savings and interest earned? Also, you note a 65% increase in savings...what do you attribute this to (technology, the front load injection of funds, the interest earned from increased number/value of loans, all of the above!)?

Philip Acton , DreamStart Labs Inc., UK
19 June 2022

Hi Kellie,
"Savings" are funds injected by members (including ourselves in the pilot) and "Shareout" (or Payout) is the proportionate distribution of Savings, Profit and Fines at the end of the Savings Cycle. I hope I understood your question correctly - apologies if not. On the reason for the increase in overall savings rate, I believe this is because members upped their contributions as soon as they saw us come in with our micro equity. So the knowledge that there would be funds for lending early on provided an incentive for members to save more in the early part of the Savings Cycle than last time, leading to an overall increase within that Cycle.

Hsu Ming-Yee , Intean Poalroath Rongroeurng MFI, Cambodia
12 May 2022

An interesting concept. Have you explored whether micro-equity can be applied to individual loan client?

Philip Acton , DreamStart Labs Inc., UK
16 May 2022

Hi there. No, we have not done this yet. Have you any experience of doing so? If so, I would be interested in learning more.

Hsu Ming-Yee , Intean Poalroath Rongroeurng MFI, Cambodia
17 May 2022

Unfortunately not. Although probably better for the client than microcredit, it entails many challenges for the MFI.

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