The following is a guest post by Gemma North, an associate with Saving for Change, a community finance program run by Oxfam America.

?In 2009, I worked for a microfinance institution called CREDIT in Cambodia.  On a field visit, I met a borrower who sold clothing and knick knacks to tourists visiting the nearby Angkor temple complex.  She explained that her loan had helped her to expand her business and, as a result, she was planning on taking her kids out of school to work with her to continue increasing sales.  Sometimes the effects of providing the outcomes are not always ideal.  Microfinance expands the choices of the poor, and those choices are entirely their own.  Perhaps having the borrowers’ children involved in the business made the most sense for the household at the time.

The impacts of microfinance vary, but clearly a market for credit exists for the poor.  But there is also a need for savings mechanisms among the unbanked and under-banked (both internationally and domestically).  To generalize, in the developing world, the rural and urban poor have few formal outlets for savings.  They save money by investing in assets (livestock, jewelry, etc.), storing cash at home, organizing a savings club, keeping it with a “money guard” (a person who holds the money, usually free of charge), or a relative.  These savings are susceptible to theft, loss due to natural disaster (from fire or flood, for example), or demanding family members.  Perhaps the greatest temptation is to spend money on non-essential purchases.

Challenges in other settings can be cultural or psychological: individuals come from countries where there is a general distrust of banks and financial institutions; or, because of their low-earnings, individuals do not always realize they may have some discretionary income that can be put aside.  Because the barriers to saving are numerous, there is an opportunity in providing a secure place for people to save.

Saving for Change, a microsavings organization started by a former microfinance practitioner, offers a solution to this problem.  The program, which is being implemented in Mali, Cambodia, El Salvador and Senegal, helps the rural poor to form and operate savings groups and provides training on financial literacy and basic accounting.  The groups elect their own officers; create participation guidelines and bylaws; and determine their weekly savings amount, loan interest rate and record-keeping mechanisms.  The program is adaptive – for example, some non-literate groups have devised an accurate oral accounting system based on group memory and counting sticks or rocks).  Participants in the program are able to save enough to purchase inventory for a store, pay for school fees, purchase seeds for planting or a cow for labor, or buy a plot of land to build a house.  If a member needs a large sum of money quickly, they can borrow it from the group’s fund.  By repaying the loan and added interest, they contribute to the growth of the communal savings, which is disbursed to the group members at the end of the saving cycle (which can be timed to coincide with a period when all the group members need more money, such as when food is scarce or before a major festival).

There are many advantages to this system. A communal savings organization based on mutual trust allows people to overcome the barriers to saving.  Women are able to accumulate funds independently of their spouse.  The model is similar to traditional savings groups (such as tontines), building on familiar and existing systems, which increases the speed and ease of uptake.  Expansion often occurs due to word-of-mouth, with groups forming spontaneously or with help from existing groups.

In order to expand the program, implementing organizations train volunteers to start new groups in other communities.  At an expense of $20 per client, the per-user cost is a fraction of what microfinance institutions spend to offer similar services.  As a result, Saving for Change and similar models are able to reach individuals that are underserved, if not completely neglected by MFIs.  More often than not, participants in savings groups, the poorest of the poor, live in areas that are too costly for MFIs to reach.

Providing credit is important, but providing a mechanism for saving is essential for achieving financial independence.  When individuals save on a regular basis, they are able to build up a large sum allowing them to cover larger expenses or make investments (such as a daughter’s wedding or fertilizer for the upcoming season), or create a cushion against catastrophic events, helping them to maintain and build on their existing assets.  Mechanisms to promote saving–communal loan funds or savings groups–can help expand financial self-sufficiency in less-served areas among the poor.