Then They Tell Two Friends: The Power of Networks in Microfinance

If asked to picture a savings group, the images, like the one below, that most likely would come to mind are ones of circles of women sitting on the ground, maybe under a tree.  That’s how we typically conceptualize savings groups (and microfinance clients) - as a single, essentially independent, unit.

When investigating why savings groups are effective tools for the poor, it’s helpful to stay at the individual or unit level. But what do we know about how groups interact with each other? If we zoom out a bit, the group under the tree becomes one node in a larger network, creating a picture that looks more like this:

Many people participate in multiple groups, each with its own set of rules and time frames. Overlapping membership and social connections among groups form networks that may have benefits at a larger scale than a single savings group like increased political capital or efficient ways of distributing goods and information.

Economists at MIT have found evidence of the importance of social networks in the spread of information about microfinance. One study from this body of work reports that even those who do not participate in a new program can still affect its take-up and promotion. In other words, neighbors of a microfinance client may spread the word about a new credit product even if they are not borrowers. The process of sharing information through social networks is like that old shampoo commercial – someone tells a friend about savings groups, and then they tell two friends, and so on.

When networks of savers or borrowers are (at least in part) borne out of social networks, there may be some potential for practitioners to leverage these structures to achieve various development goals. For example, Slum Dwellers International (SDI) is an international organization that works in 33 countries, each with its own national chapter. But SDI is at its core a network that begins with the single unit of the savings group. Representatives from groups at the community level link together to form regional councils, which then elect national officers. SDI aims to use the resulting network as a tool for political empowerment. Members of a single savings group can borrow and save to pay their family’s school fees and health care costs but a nation-wide network of savers may be able to harness enough financial and political capital to gain land rights and build affordable housing for members.

Similarly, microcredit clients can be thought of as nodes in a network system (similar to those created by savings groups) but with loan officers creating the connections between them. Initiatives like ILO’s Microfinance for Decent Work encourage MFI’s to leverage their client networks. The theory of change is MFIs can act as an entry point for improved labor conditions in the informal sector since their clients are most likely operating microenterprises. When loan officers meet with their clients, they can identify challenges (like the use of child labor or unsafe working conditions) and provide information on operational improvements. 

Those beyond the financial services sector may also benefit from the infrastructure created by savings groups. The Aga Khan Foundation has a case study describing how a solar lamp manufacturer used savings groups to market and distribute its products to rural populations in Uganda. By leveraging the existing trust among these groups, the manufacturer trained group leaders to introduce the product to members and offer financing models paralleling the existing regular deposit with pay-out structure. In a sense, the group acted as a buying club. A saver could either purchase a lamp when she received her normal payout or she could slowly pay it back over time by making regular deposits at group meetings. As noted in the report, the manufacturer and partner organizations “view the groups as assets that raise their credibility…[savings group members] have little incentive to abandon their groups.”

However, there is a temporal issue with these hybrid financial-social networks. Many rural communities are migratory or have shifting, seasonal financial needs. While members of a village may not change dramatically from year to year, it is unclear how cohesive networks of savings groups are in the long-term.  So indeed, there may not be an obvious incentive to abandon the group but more research is needed to view the ebbs and flows of networks over time. But first we have to move away from thinking of groups as static and independent and think more in terms of shifting networks with weaker or stronger ties at any given moment in time. That could open up a whole new set of avenues for innovation in credit and savings groups.