It’s hardly big news that household debt is often bad (I’m one of the millions of Brits who’ve been sucked in by its empty promises, to my deep regret). But not all credit offered to people on low incomes is bad — especially when their source of credit is their own savings, pooled with those of their neighbours.
For some of the world’s poorest people, responsible local lending brings more than economic prosperity. It genuinely changes lives. At this level, mutual savings-and-loan schemes, because of their collective nature, allow people to invest in commercial opportunities without being squeezed by unaffordable interest rates. They also build the mutual trust and confidence which are prerequisites for people previously in poverty to become entrepreneurs.
It’s often the only safe way for people who would otherwise be vulnerable to loan sharks to find the small-scale capital needed to stimulate micro-enterprise.
Credit unions, savings and loans clubs, self-help groups, there are lots of different ways to do it but they have much in common – saving and borrowing money in order to generate more income bring prosperity of all kinds.
Two years ago, the Archbishop of Canterbury made it his mission to take on irresponsible lenders by offering an alternative through parish churches. He’s following the example of millions of churches around the world which have tried and tested the model.
1. Income creates resilience
It’s hardly rocket science: when people are able to generate their own income their lives will improve.
Systems of small-scale savings which produce loans for income generating activities consistently deliver stability and resilience. A family’s dependence on outside assistance is reduced, and everyone in the home benefits.
Cost-benefit analysis of self-help groups in Ethiopia found major benefits from:
capital formation – in other words, the change in the asset base that has occurred as a result of improved income and a stronger culture of saving. This accumulation results in tangible gains: people are eating more and better food (which has linkages with better educational attainment and higher incomes later in life); they have a ‘safety net’ to fall back on in hard times; and they can help others around them. They are spending more on higher quality healthcare and education.
2. Economic capital creates social capital, especially for women
There’s a movement within the credit union sector to form women-only groups, especially in places where women’s status is traditionally low, because financial freedom brings social change.
Where self-help groups of this kind are set up specifically to fund income-generating activities, it’s not long before women start to turn a profit, often beyond levels of income her family have ever seen.
And – surprise! – money talks. When women who don’t usually have money start bringing cash home, suddenly they command a whole new level of respect. Their husband starts to value them more, and they have more say in family decision-making. Meseret, for example, found that her husband, who initially resented her joining the group and would beat her every night and then left her, eventually wanted to come home and be part of his family again when she started bringing in an income. Happily, her newly acquired confidence, based on her prosperity, meant that she was able to negotiate the terms of their reunion and he hasn’t beaten her since.
3. Relationships flourish when people prosper together
One of the most consistently reported benefits of savings and income-generating groups is the sense of togetherness. Poverty is often isolating, especially in developed countries, so churches and community groups are well placed to offer encouragement and hope through positive social contact.
In some groups, like this one in Glasgow, people set up businesses together. It’s much easier to find the confidence to take the step when someone else is taking it with you, especially if you haven’t done it before or you don’t yet believe in your own abilities. People don’t always know what they’re capable of until they give something a try, which means that in families where no-one is employed there’s no precedent for self-belief. It’s often extremely daunting for people to try their hand in business, so doing it together with others can be immensely helpful.
4. There’s more to poverty than lack of money
Overcoming financial pressures can give people the boost they need to believe that they can overcome other problems too, especially if they choose to stay in the group which has helped them to leave extreme poverty behind. This is now a widely recognised benefit of savings groups, and at Tearfund we sometimes set up groups specifically in order to address difficult and deep-rooted issues.
For example, in some countries our medium to long term strategy to reduce and prevent sexual violence is based on developing savings groups and encouraging them to flourish financially for a couple of years. We then encourage them to discuss women’s experiences of rape and domestic violence, and consider how they can challenge the community’s tolerance of these crimes.
When people start to prosper financially, they’re less likely to settle for a poor quality of life overall. Financial freedom releases belief in individual potential and family stability.
5. Financial prosperity changes people’s priorities
Access to markets creates confidence, and families often become much more cohesive.
Family size reduces as people become economically active, because people’s priorities change. Population growth is a consequence of poverty rather than a cause.
It’s usual to see strong levels of school attendance among children in families participating in savings groups.
And in countries where men sometimes travel hundreds of miles to find work and only return home once or twice a year, leaving their families vulnerable and living hand to mouth, savings can help families stay together. There is an immediate benefit to the children in particular, who are less likely to be trafficked if they live in a strong family where there’s a steady income and they’re learning skills at school which will help them get or create jobs.
The primary cause of modern slavery – on the supply side, at least – is poverty. Decent livelihoods, good education and strong families protect children from being trafficked.
And, here in the UK, credit union membership is even being offered by churches to couples as part of their pre-marriage prep.
Credit unions and savings groups are not an end in themselves, but they’re uniquely placed to help many people take their first step out of poverty and into the market. Their communal approach, when facilitated well, doesn’t deter people from capitalism; it helps release people from the things that have prevented them from flourishing and gives people the impetus to thrive.
And places of worship, especially churches, are well placed to offer exactly this kind of support because they’re equipped to encourage people to believe in themselves and their families, and because logistically they’re based locally and – hopefully – seen as a safe and trusted location.
