Sharing the Risk: “Micro Equity” for Savings Groups
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? 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:
- Clients in developing markets are highly exposed to external risks.
- 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:
- The Micro Equity pilot groups increased savings by 65 percent on average.
- The value of internal loans increased by an average of 110 percent.
- 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:
- All groups really liked the product.
- Every group repaid the Micro Equity investment at the time of share-out as agreed.
- 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?
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.
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Firstly, I greatly appreciate that DreamSave is socializing this concept and inviting input from your peers in the industry. Tha's highly commendable.
I've heard about this concept from your team previously, yet I continue to have serious misgivings as to its true motivations and the potential for usury and profiting off the poorest. It's highly questionable that you're actually taking on 'the same risk' as an actual member, for whom a default could prove calamitous to their entire family, and your avatar certainly is not working hard for their returns, yet this infusion of capital from wealthy investors outside the group earns the very same high returns as the actual members.
I'm very eager for some clarity from you on this. I appreciate DreamSave very much, and I'm certainly in favor of opening capital sources for the poorest. But it seems that much more work needs to be done on ensuring a moral compass for this "investment opportunity" lest it become a scandalous stain on the whole industry.
Friends, re-reading my comments above, I regret the implication of some of my wording. My concerns are not aimed at DreamSave specifically, but upon what could become a fast-growing initiative attracting players with myriad motives and intentions. My goal was/is to spur dialog on these ethical questions early in the movement in order avoid some newspaper "expose" about wealthy investors profiting off the poorest with returns which anyone outside the microfinance industry would deem excessive.
I again salute DreamSave for socializing this nascent effort with your peers. Sharing ideas like this to invite dialog is the kind of proactive openness we need in order to encourage high standards and transparency. I continue to hope these concerns will be addressed as programs like these develop. Thank you again for providing this forum for open dialog among co-laborers.
Thanks for all the great interest in this article. We have heard many positive comments across the industry about the potential for micro-equity offerings to help savings group members. We’ve also heard a couple of questions along the way about what we are doing to mitigate the potential risk to end users. These are great questions, especially when vulnerable people are involved, so we thought it might be helpful to add a bit more context on this front.
1) The micro-equity projects we have done to date have been designed together with savings groups, asking the input of both group leaders and regular members at every step. We use a human centered design approach for these offerings, proposing ideas, asking for feedback, and modifying terms to fit what group members believe is fair. After listening to user feedback, we take a solution to the pilot phase only when everyone involved understands the terms, is confident they are getting good value, and agrees to move forward.
2) This offering has been designed in collaboration with our NGO partners. Every meeting with group members has occurred with NGO partners present, ensuring that we are learning together, and that any concerns or risks are noted and addressed early on.
3) Once the initial micro-equity offerings passed the open design phase, participation was entirely voluntary for groups and members. In all cases, we were very clear that groups were more than welcome to continue using DreamSave for free with no obligation whatsoever. In all cases, the groups who participated were excited to try it and did so voluntarily.
4) After the first full cycle of taking a micro-equity investment and seeing positive benefits such as increased savings and increased profits for all group members, 100% of members said they liked it and wanted to sign up again.
5) Our NGO partners participated in our evaluation of the first pilots, and their M&E teams lead an evaluation and reported favorable findings.
As with any new idea, we are constantly listening to our users for ways to improve solutions like this. Each pilot includes focus groups in the beginning to get user input, as well as discussions with group leaders and individual members at the end to hear their honest feedback after trying the solution. Many of the ideas you see in our original blog post came directly from savings group members — as did various improvements and safeguards we have added since. We’ve also found that different countries and cultures may require variations to better fit what users want.
While we are in the early stages of innovations like this, we are encouraged by the results so far. Throughout this process, our top priority has been to establish trust with groups. We’ve found that when you are open and transparent with end users, they tend to be open and transparent with you. If they like an idea, you’ll know. Conversely, if they think a proposal is unfair or risky in any way, they won’t hesitate to tell you. This kind of feedback has been invaluable in designing our micro-equity offerings to date and will continue to be essential as we learn from customers and improve it in the future.
Hi, Philip. When would your product come to Nigeria?
I would like you to reach me about whatever you are thinking about Nigeria
Hi there,
Please contact me at philip@dreamstartlabs.com to discuss. Thank you.
Hi Olabiyi, I am the Product Manager for the DreamSave App and wanted to let you know that DreamSave is now publicly available on the Google Play store worldwide! You can go directly to https://tinyurl.com/DreamSave2
We already have customer support in Nigeria and the app is translated into Hausa. If you'd like to discuss more including digitizing savings groups in Nigeria using DreamSave, please email me at jennie@dreamstartlabs.com
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?
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.
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.
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 Wes@dreamstartlabs.com to discuss? He is aware of our exchange, and has read your great book - as have I!
Jeff, I am wondering if you could explain what the problem is with banks or others lending to savings groups? I can see where it could be an issue if the banks are lending to the individual members of the group. However, it seems to me that if the group itself takes the loan, the group almost always is making money by lending that money to its members at a higher rate. Additionally, the group gets the immediate benefit of increased liquidity which it can use to lend to members (especially if the loan comes to the group at the beginning of the loan cycle), and the benefit of fully closing out the books and fully distributing all of the savings and interest from the previous cycle. The final benefit of an external loan would appear to be that it is actually cheaper for the group than taking a quasi-equity instrument. What seems to be a real need is a way to get savings groups access to loans in a way that works well for the group (i.e. at the beginning of the cycle, at a rate lower than the internal rate charged to members.) So, wondering if you could expand on what the problem is with loans to savings groups. THANKS!
Christopher,
Thank you for your question. First the bad before I talk about the good. There is a mismatch between the objective of the bank which is to make money while putting the group's fund at risk in case of loan payment issues. What typically happens is that the bank makes expensive loans to the group and are often larger than the group can manage and with too little due diligence about the quality of the groups. The group has its own set of problems managing this sudden influx of money and often provides loans that are too large to the better off members of the group who often default, the group loses its equity and the group collapses. Often banks hire the savings group trainers and reward them for making these too large loans using the trust they have established with the groups. The Niger, for example, on average, the more groups receive external the more likely it is that they will disband.
In contrast, in India, with the self-help group bank linkage initiative, external loans operate as you suggest, with the additional capital provided by the bank at a low interest rate, relent to the members at a higher interest rate with the group repaying the bank and still coming out ahead. From what I have read, the injections of external capital from the bank has enabled members to grow their businesses and farms more quickly. Even this story is not as simple as it seems. If you (or any of you reading this response want to discuss this further we can set up a call. Check out our website grassrootsfinanceaction.org. Contact me at jeffaashe@gmail.com
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.
Hi Ekalale Patrick,
Thank you for your comment. Please email me at philip@dreamstartlabs.com and I can connect you to our country representative in Kenya. I look forward to your message.
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?
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.
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?
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.
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.
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.
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.
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
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!)?
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.
An interesting concept. Have you explored whether micro-equity can be applied to individual loan client?
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.
Unfortunately not. Although probably better for the client than microcredit, it entails many challenges for the MFI.
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