Financial inequalities; defining our age
A decade on from the global financial crisis, can the world's banks and financial institutions learn about value and values from grassroots savings schemes that help the world's lowest-income people?
Ten years ago the world was rocked by financial crisis. Governments and international institutions spent huge sums propping up banks that had been engaged in risky, and often ethically dubious, lending and investment practices. The UK government alone spent £187bn supporting its banking sector.
A decade on from the crash, commentators are reviewing the economy and concluding that the financial crisis is over.
But it is clear that the crisis is not over for the hundreds of millions who do not have access to finance, or who have access on terms that increase their household insecurity.
IIED has spent three decades working with grassroots groups that provide access to finance to those who need it most: the world's lowest-income people. We believe that community-based savings groups demonstrate the possibilities that come from a rethink of financial services.
Savings and collective finance
Community organisations working in towns and cities of the global South have long recognised the critical role of finance. Residents need cash because there are few opportunities for subsistence agriculture and limited free access to ground water and fuelwood. Needs are particularly acute for the one billion living in informal settlements in towns and cities of the global South.
Community organisations have reconfigured financial services so that they reduce vulnerabilities and improve livelihood security. Their innovative processes are all built on savings groups, led by women seeking to meet their needs and those of their families.
Savings, accumulated from thousands of households organised into small neighbourhood groups, enable community-managed loan funds to be established. Collective management of lending provides an additional layer between formal finance systems and informal livelihoods, helping to protect capital and households.
Households that fail to satisfy the requirements of a commercial lender can come together to set up savings accounts. These savings can then protect households from irregular incomes and associated vulnerabilities.
Establishing a credit history and financial capital enables individuals and groups to take out loans, which enable them to improve their homes, livelihoods and neighbourhoods.
Community managers know the struggles of individual households and are able to discriminate between 'free-riders' and those with a health crisis or other emergency. This helps to protect their own financial capital.
Innovations from the bottom up
Some of these movements are benefiting significant numbers of people. In Sri Lanka, for example, the Women's Coop has 80,000 members, and has integrated savings, lending and insurance to create new development opportunities.
But the primary contribution is not scale, rather it is the innovative reconfiguring of norms and values, rules and regulations, so that finance reduces – not exacerbates – the vulnerability faced by low-income families. Three decades of innovation by federations of women-led savings groups have resulted in a diversity of models that can address local needs with their own unique institutionalised financial management practices.
In Kenya, the Akiba Mashinani Trust (AMT) is working with an urban social movement, Muungano wa Wanavijiji, to address the needs of its members despite low income and tenure insecurity.
Group lending is enabling informal entrepreneurs to access essential loans. New approaches to housing delivery are enabling squatters and tenants to access services and secure homes, meaning that AMT and Muungano's financial innovations are couched within a broader community effort to upgrade urban informal settlements and markets.
In India, the National Slum Dwellers Federation and Mahila Milan (a network of women's savings collectives) have worked with an NGO, SPARC, to leverage government subsidies. This alliance has used development assistance to capitalise locally managed funds. Over 30 years, through subsidies and loans, more than 180,000 households have been supported to improve their living conditions. A further 75,000 households have obtained tenure security.
As significantly, this alliance has secured capital that enables community organisations to continue their work even though development assistance is increasingly difficult to obtain and government finance rarely covers the cost of local participation.
Many of these groups have worked with local authorities. A recently published study of City Development Funds in 263 cities, across five Asian countries, shows the potential for urban transformation.
And in Thailand, government finance to support grassroots savings groups has enabled community financial initiations to grow, and now 850,000 savers have access to loans and subsidy finance for neighbourhood upgrading and housing improvements.
Collecting people, not finance
Thousands of savings groups are networked into city and national federations, and in a global network called SDI. These savings groups do not collect money; they collect people. And they collect people because they understand that governments will only start to make substantive shifts in policies and programmes when millions are mobilised. For 21 years, SDI has been building a global social movement from daily savings contributions.
The dozens, hundreds or thousands of savings groups that make up each federation share some characteristics with microfinance, delivering small, low-cost loans with little delay, and accepting group-based collateral. But they focus on developing financial services that work for those with the lowest incomes.
Federation savings groups also take collective action — dealing with evictions and related land-tenure issues, basic services and shelter challenges. Their local funds provide the architecture to organise communities and leverage investment from the social capital and savings practices.
Grassroots organisations of shack and slum dwellers know that they cannot transform cities on their own. They have links with local authorities and national governments. There are opportunities for external donors to work with organisations of the urban poor. External funders cannot fund hundreds of small projects – but they can fund the local or national funds that can.
To date, neither global financiers nor development agencies have shown much interest in reconfiguring financial systems to reduce rather than exacerbate urban poverty. I believe that they are missing an opportunity both to increase the capital available and improve the efficacy with which such capital is used.
Most of all, it means that the lowest income households continue to be left behind by business-as-usual approaches to development.
The financial crisis made us ask the question: is the global financial system fit for purpose?
The next question is: when will the global financial system recognise the value of the innovations taking place in informal settlements across the global South?