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Micro-loans or micro-savings: what works?

Micro-loans or micro-savings: what works?

“Is there any one member of this group going for a loan from FINCA again? No! No! Is there any member who is going for micro-loan? No!” Such was the dialog I heard in Malawi from a local savings and loans group (called MAVISALO) discussing micro-loans. Where I had expected to hear great stories of micro-loan organisations empowering people and solving problems, instead I heard tones of disgust. David Roodman’s Due Diligence: An impertinent inquiry into microfinance finds little compelling evidence that micro-loans alleviate poverty or empower people, two of the most common themes in micro-credit marketing.

In one of the appendices, Roodman poses a critical question, “how far should nonprofits go in misrepresenting what they do in order to fund it? It is not an easy question: what if honesty reduces funding?” (loc. 3859). The marketing success of microfinance, and the surge of commercial, governmental, and individual financing that follows, clearly clashed with my experiences in Malawi.

The marketing of micro-credit succeeds for a number of reasons. On one hand is the appeal, especially in North America, of stories of individual “bootstrap” entrepreneurship. These stories are fed to us through loan agents who are trained to create stories of everyone being an entrepreneur and single loans that lead to successful businesses. On the other hand, the micro-credit fundraising model creates an impression of an “unmediated” loan (loc. 3434), where donors/investors feel they are making a one-to-one, direct human connection.

“If people continue to channel billions to the best storytellers,” Roodman says of investors, “they will continue to distort the very thing they mean to support. But if they recognize how their choices have been part of the problem, then they can become part of the solution” (loc. 3456). Can NGOs use the stories as part of a solution that both accurately represents their relationships with aid recipients and also provides assistance that is beneficial?

Throughout the book, Roodman points to the potential of micro-savings to address the financial needs of the poor, especially for protection against financial shock. Indeed, saving seems to emerge as a bright spot in the midst of tepid evaluations of micro-credit, especially considering that “Whatever credit can do, savings can, too. Both can finance investment, pay for consumption, and help a family through health crises” (loc. 1382). While Roodman’s examination of micro-credit research shows benefits only in very specific situations, “the one high-quality study of micro-savings does find economic gains” (loc. 1857). It seems, then, that micro-savings has the potential to both provide a better poverty-reducing vehicle to the poor and tell a better story to donors.

Let’s consider how can we take the elements of successful micro-credit marketing and begin to market self-help and village savings groups. To start, we have to acknowledge that savings programs have an inherently different narrative from micro-credit; it’s not a story of giving a loan or other object directly to another person. Most likely, the NGO costs for establishing and supporting savings groups are paying for infrastructure to keep money safe, and salaries of savings agents. Yet, several aspects of micro-savings, especially when provided through self-help groups, seem poised to allow NGOs to tell the great “lifting out of poverty” narrative that has been applied to micro-credit with more accuracy. The work of micro-savings has less leeway for misrepresentation – either people are saving, or they aren’t – we don’t have to ever know how people spend their money or if their business is successful.

Here are some points gleaned from Roodman, which help craft an honest story about micro-savings that still lends itself to donor impulses:

  • Savings actually can reach the poorest of the poor (loc. 1190). One of the best lines of the book is a poor woman in rural Niger saying that micro-credit “is for rich people” (loc. 1205).
  • People want to save (loc. 3364) and don’t want to be in debt (loc. 1384). Giving people services that help them do what they want is better for them and a better story.
  • Savings programs seem to help women more than men (loc. 2233; 2809). Women are sympathetic story characters and are chosen for many loans programs.
  • Savings groups, which unlike micro-finance institutions (MFIs) can be flexible and reliable, are more likely to empower members (loc. 2476; 2820; 3616). Also empowering, self-help groups foster a sense of group ownership (loc. 2855).
  • Savings can improve the impact of micro-credit (loc. 1531), improving the stories told by MFIs that provide both services.

Of course, the reality of the world makes it unrealistic to expect that any single service will eliminate poverty. Part of the truth in marketing is not just telling a more real story but also sharing a more complex story. Promoting micro-savings programs and stories alongside the many narratives of micro-credit and entrepreneurs can subtly prod donors to consider a wider context of financial services and a wider understanding of life and economic needs of the global poor. While Roodman shares a discouraging overview of micro-credit, there is a more hopeful story of micro-savings as a way to protect against shock and, yes, cover business expenses for entrepreneurs. I came back from Malawi wary of micro-credit and large MFIs but enthusiastic about local groups cropping up to help people move away from loans and towards saving.

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Tanya Cothran is the Executive Administrator at Spirit in Action, an international micro-grant organisation working in East Africa. Trained as a librarian, she finds satisfaction in tracking down bits of information. Tanya is working on a book of essays, "Smart Risks: How small grants are helping to solve some of the world’s biggest problems," with 23 other international development professionals. She holds a B.A. in Geography from UC-Berkeley and a Master's of Library and Information Science from St. Catherine's University, and she lives in Toronto.

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3 thoughts on “Micro-loans or micro-savings: what works?

  1. […] ’ David Roodman’s Due Diligence: An impertinent inquiry into microfinance finds little compelling evidence that micro-loans alleviate poverty or empower people, two of the most common themes in micro-credit marketing. Tanya Cothran summarizes  the findings of David Roodman’s work on micro-finance loans by FINCA in Malawi, in which he finds loans not conducive to improving the lot of the poor and warns of the issues of the commercial viability of the loan business being put above the needs of the clients. I share this concern, micro-finance providers must be carefully regulated to ensure good practice is adhered to and the livelihoods of the poor are enhanced not destabilized. Can this be done? Probably not. […]

  2. […] week a book review I wrote was posted on the international aid website My review below explores why micro-savings is well poised to alleviate poverty. Micro-savings […]

  3. The success of microcredit must be evaluated in the context of the motivation of the organization that provides it.

    Microfinance institutions that are for-profit and exist solely to make money from the poor have a dismal social track record.

    Anti-poverty organizations that use microcredit as one tool in a holistic program that includes education, business training, literacy training, access to healthcare, etc. have a strong record of moving people forward economically. Some organizations like Esperanza International in the Dominican Republic are calling this approach “microfinance plus.”

    That’s why participation in Soap Hope’s microfinance capitalization program requires the institution to be nonprofit and to use Grameen Foundation’s PPI (Progress out of Poverty Index) or a similar measurement tool to show that the program measurably impacts the communities they serve.

    If a person has no access to initial capital, there are no savings to bootstrap from. Granting programs cannot scale for the same reasons that all donation-based non-profits cannot scale. That’s why I believe non-profit, measurement driven microfinance is one of the best ways to create opportunity for the poor. (You can see a discussion of the nonprofit sustainability problem, and a solution, at

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