Banking the Unbanked: How Savings Circles Can Help the Poor Build Affordable Access to Capital

The following open letter is a part of the Presidio Graduate School's Capital Markets course. For one of the course assignments, students write a letter to an oversight body, government entity or other appropriate institution. The topic: changing the sector of capital markets that relates to their chosen topic so it reinforces principles of sustainability. Follow along here.

An Open Letter to the Director of Community Programs at the U.S. Department of the Treasury, Office of Financial Education and Financial Access

Dear Ms. Quittman,

We are MBA business students at Presidio Graduate School studying the financial activities of low-to-moderate income individuals; in particular, we are studying systemic barriers that prevent many people from directly participating in the formal economy. First, let us say that we appreciate all of the resources you have graciously extended to help us understand what the administration is doing to help the unbanked and underbanked transition into the financial mainstream. The cycle of poverty seems unbreakable if one cannot build savings or a credit history, and instead must rely on costly non-banking alternatives (such as payday loans and check-cashing services) as a primary means for financial transactions.
Helping the unbanked move from the alternative financial sector into the financial mainstream requires that they are given access to formal savings vehicles which provide a necessary link to build credit and encourage money management. However, banks and credit unions are reluctant to offer these services given the low margins and risks associated with serving this demographic. One way to overcome these constraint is to encourage group savings for the poor. When low-income individuals save collectively, they accumulate a larger amount of money more quickly than if they saved on their own. By pooling their savings in a common fund, they increase their liquidity and working capital without the burden of borrowing money. In addition, group savings offer other benefits such as reducing individuals’ vulnerability to risks, safeguarding savings, increasing financial literacy and promoting social values that encourage saving.

While group savings vehicles known as Rotating Savings and Credit Associations (ROSCA) are primarily an informal practice in the U.S., it is a common way to save in communities and villages throughout the developing world. In brief, members of a ROSCA meet regularly to make equal contributions to a common fund which is given in whole or in part to each contributor in turn. Countless examples, such as Oxfam’s “Saving for Change” program, CARE’s “Village Savings and Loan Associations” and The Mission Asset Fund (MAF) “Cestas Populares” program in San Francisco, prove that the ROSCA model can deliver low-cost access to savings and loan services for the poor. Since its launch in 2008, “Cestas Populares” has helped 295 participants save close to $500,000, improve their average credit score by 49 points, and decrease their typical debt balance by $1,208. These results indicate the potential of ROSCA to help people become bankable and lessen reliance on predatory lending services.

We would like to propose that The U.S. Treasury’s Office of Financial Education and Financial Access consider designing a pilot program to demonstrate the effectiveness of ROSCA to help the underbanked transition into the mainstream financial system. Specifically, the pilot could seek to understand what types of policies and partnerships will need to be implemented to formalize ROSCA and sustainably scale this practice to reach the 30 million U.S. households currently considered to be financially underserved.

We are very encouraged by your office’s work to pilot initiatives such as The Community Financial Access Pilot and The First Accounts program to increase access to financial services among low-to-moderate income individuals who lack bank accounts. To this end, we believe that learning how to formalize the ROSCA model as a low-cost savings and loan tool will help The U.S. Department of Treasury design policies that ensure a fair and inclusive financial system.

Thank you for taking the time to consider our proposal. We welcome the opportunity to discuss this further.

Kindest regards,

Shehreen Johnson
Rudi Anderson