Imagine being unable to borrow money for basic needs or emergencies because the bank is too far away or requires collateral or proof of identity that you are unable to provide. This is a daily reality for millions of rural people living in poverty around the world. However, a recent study by my research team shows that there is a simple yet powerful solution: community savings and loan groups.

Established with the support of NGOs, these groups often provide bookkeeping training to community members and provide secure boxes in which to store funds. These groups manage their own small loans and grants and pool the interest earned at the end of the year. Local savings and loan groups have become popular in recent years, serving more than 12 million people in 70 countries.

They are proven to be able to achieve high repayment rates due to their trust-based, local knowledge and inherent flexibility in the way they operate. This model has proven particularly empowering for women in low- and middle-income countries.

But there's a catch: Their ability to lend is limited by members' ability to save. Each year, members of the organization pool their money by starting from scratch and making small weekly donations of what they can save. This means that these groups often have no funds available to borrowers during the first few months of the annual cycle.

But what if an outside entity, such as a philanthropist or NGO, provides a capital injection? Can these groups manage money effectively? My colleagues and I set out to find answers.

Savings community + outside capital = winning formula?

As a group of international development researchers and development economists, we conducted a randomized experiment in rural Uganda.

We worked with researchers at Uganda Martyrs University to distribute funds from private donors to 50 savings groups. Each received about $450, about 25% of their median annual savings. We wanted to see if these groups could manage outside money as well as their own savings. We also tracked 50 additional groups that were similar in every way but managed only community members' funds.

We find that recipients of external capital receive larger loans and receive larger payouts due to the additional interest earned. We also do not find any differences in default rates, payment delays, or savings rates, suggesting that savings groups did not issue riskier loans or relax repayment policies after receiving external funding.

We have not found any evidence that external funding “crowds out” local savings by encouraging local members to reduce their own contributions, as some may fear. Our cost analysis also found that investing external capital in these groups could generate a 40% return.

These findings could have important implications for NGOs working to make financial services more accessible. Providing funds to savings groups they have helped establish in their communities can be a simple way to increase group members' access to loans when they need it most—not just when funds are low at the beginning of the group's annual cycle, but during farmers’ planting season or during disasters in areas vulnerable to climate change or conflict.

After completing our research, savings groups paid back the money they borrowed. We then lend this money to the control group so they can tap into the additional capital as well.

What questions remain unanswered

Our findings suggest that savings groups are good stewards of external capital funds in rural Uganda, but because community trust and social cohesion depend on local culture, what works in Uganda may not work in countries such as Bangladesh. More research in different countries and contexts is necessary. Similar savings groups are popular in other countries in Asia, Latin America and Africa.

Additionally, some savings groups cater to certain types of people – for example, there are groups for youth and women only. Further research could investigate whether external capital is particularly useful for these types of groups.

But for now, this research offers a promising and effective intervention that could help some of the world's most vulnerable people access finance when they need it most.