7. Informal Saving Groups
Informal saving groups are groups of people who save money in a common fund and borrow directly from their savings. Informal saving groups are based on a predetermined rotation where every member is able to obtain a loan. Among these groups, credit is perceived as a human right, therefore, a development financial model is utilized.
Informal saving groups have between 10 and 30 members who meet on a monthly basis. During these meetings, group members are required to deposit their savings. The money collected will then be given to a group member. As soon as the debtor repays his loan, another member obtains his credit. The main benefit of Informal saving groups’ is that they discipline people. Owing to the social pressure, members are more likely to meet their monthly saving commitments. The interest rate that members need to pay on their loans are much lower than the ones requested by banks and MFIs. These kinds of organizations are spreading rapidly in rural areas of developing countries.
Every group serves a specific purpose. In Kenya for example, Joyful Women’s Organization (JOYWO), a table banking organization, helps rural woman and youths to promote food security. The term “table banking” comes from the method on which money is deposited and exchanged, perhaps on a table. Members of a group share a common bond: for instance in JOYWO, members are women above 18 years old and young men between 18 and 35 year old. Due to the success of the group, more males are willing to join. Therefore, a new rule allows 1/3 of the group members to be male. In JOYWO groups, both short- and long-term loans are possible. People who are members more than 6 months can apply for a long-term loan up to 3 times the amount of their savings with an interest rate of 1% monthly and a payback time between 12 and 24 months. Short term-loan need to be repaid in 1 month with an interest rate of 10%. The loans provided are mostly unsecured, where smaller valued collaterals such as household assets (television or chairs) are required sometimes. Group members guarantee for each other: If a member fails to repay her loan due to a genuine reason, the other members will do a fundraiser and clear her/his debt. In case of financial distress, a member can withdraw all her/his savings, but a penalty may be applied.
In order to join a saving group, the following requirements need to be met:
- Nationality of a specific country (i.e. people with Kenyan citizenship can only become JOYWO’s members).
- Members need to belong to a specific social group and /or share a common bond.
- Group members need to know the new applicant and must accept him/her into the group.
- The new member must commit to take part to the monthly group meetings.
- Monthly donations are required.
- The members need to show commitment to the group and to group activities.
- Group of people willing to organize their saving.
- Sometimes informal saving groups are administrated from a central organization, which also helps them to expand their funds through external donors.
Even though formal financial institutions offer saving accounts too, poor people need to organize their savings themselves. Their low amount of savings and their frequent transactions do not cover the operating cost that banks charge.