Self-funded groups are an increasingly common way of delivering microfinance services. In India, for example, self-help groups increased their membership dramatically in Andhra Pradesh after the microfinance crisis of 2009-2010. In Africa, several international NGOs are promoting village savings and loans associations (VSLAs) as member-driven, local institutions.
Can these groups “replace” traditional microfinance, in the sense that they do not need the intervention of loan officers or professional managers? An interesting paper contributes to answering this question.
Brian Greaney, Joseph P. Kaboski and Evan Van Leemput conducted an experiment to investigate the impact of having a remunerated agent, rather than a traditional NGO worker, manage Saving and Internal Lending Committees (SILCs), a functional equivalent to SHGs developed by the NGO Catholic Relief Services in Africa. The authors randomly assigned 5,700 group to be managed by either "entrepreneurial agents" allowed to charge a fee to the members of the group or “traditional agents” paid by the NGO and providing their services to the group for free.
They found that the "entrepreneurial” agents had much higher-performing groups than traditional agents: the former managed groups in which members took bigger loans, invested more in their business, and had bigger businesses. No impact was detected on household income, but the results suggest a possible impact on consumption.
These positive outcomes were not brought about by an increase in group size, but rather by a change in the composition of the groups: entrepreneurial agents brought in wealthier, more business-oriented members.
In parallel, a randomized controlled trial impact evaluation of Village Savings and Loans Association (VSLA) in Africa did not find any net impact of participation in the VSLAs, which are entirely self-funded and self-managed. These results need to be considered with caution since results from other evaluations of similar programs are still pending and may turn out to be more positive.
It appears that groups of borrowers do better when they are not completely left to themselves, and that external, professional agents (such as the “entrepreneurial agent” studied in this project, or loan officers) have a unique capacity to identify promising borrowers and supporting them.
While this finding does not support a blanket recommendation that self-organized microfinance should not be supported, it is critical in helping us understand the differences between various ways of providing financial services to the poor. As a whole, poor households benefit when a variety of products and services are offered to them, in a variety of ways.