Social Finance - Tue, 06/18/2013 - 13:28
Though microfinance institutions have helped many at the Bottom of the Pyramid (BoP) escape from poverty, such programs continue to receive widespread criticism. Some of these concerns, including aggressive lending practices, and the high profits generated by microlending organizations are described in greater detail in a 2011 post by Alex Kjorven.
In response to such criticism, institutions have begun to enact client protection programs, like those described by Eugene Ellman in his April post. In other instances, NGOs such as CARE and Mennonite Economic Development Associates (MEDA) are undertaking alternative savings and credit models in order to effectively meet the financial needs of the rural poor.
An Alternative Model: The Village Savings and Lending Association (VSLA)
A village savings and loan association is a group of 10–20 self-selected individuals who agree to save a predetermined amount each week. As the pooled savings grow, members can take out loans and pay interest to the group, allowing the fund to expand further.
Pioneered by CARE, the VSLA model is a low cost, effective, and sustainable strategy for building financial literacy. With VSLAs, the previously “unbankable” have access to savings, credit, and social insurance. Due to their many benefits (which are outlined below), such groups have cropped up in Ethiopia and around the world. Presently, numerous NGOs have picked up the VSLA model and successfully adapted it to their own initiatives.
Working with Community
Beginning in mid 2012, I have been fortunate to have had the opportunity to support MEDA’s VLSA strategy in Ethiopia. In the North Eastern African nation, MEDA’s project aims to raise the income and improve the livelihoods of 10,000 farmers and weavers through building capacity in the rice and textile value chains. Forming these village associations strengthened the overall project impact because it addressed the financial constraints faced by farmers and weavers.
Observations from Ethiopia: Why do the VSLA programs work?
Since the group is self-selected and members are from the same neighbourhood, social capital is high, motivating members to save weekly.
Self-Directed, Flexible, and Responsive
The members are independent decision makers, and create a group flexible to their particular needs. Members can easily respond to specific demands of the group, such as sudden deaths or unforeseen business risks.
VSLAs serve non-literate as well as literate people. Some members are already part of informal credit groups, like a Rotating Credit and Savings Association (ROSCA), and a VSLA is a natural extension of such programs, readily adapting to the rural environment.
The group is voluntary and small, allowing for simplicity and accountability. Each VSLA has its own set of bylaws, which all members must follow.
The VSLA serves as a platform, bringing people together to share community issues (such as gender rights or the incidence of HIV), encourage income-generating activities, and promote membership to microfinance institutions.
VSLAs are encouraged and usually continue into their second cycle, independent of project support.
The model is cost-effective. It requires only a limited number of inexpensive startup materials including, a metal cash box, plates, registration books, keys, and stationary.
The VSLA model faces several limitations. Firstly, participating groups are constrained by the amount of total capital saved by their members and therefore may be unable to meet member’s demand for loans.
Secondly, after the initial 9–12 months of the program the VSLA participants graduate from the program and “share out” the accumulated savings between members. At this point, The VLSA participants may then choose to halt saving entirely or continue saving their money independent of project support. Such an annual “share out” of accumulated funds reduces the ability for members to save greater sums of money or provide long-term loans over several years.
In sum, while effective, VSLAs are limited to simple financial products, which can be inadequate in comparison to products offered at formal institutions.
Since the project’s inception two years ago in Ethiopia, almost 90 VSLA groups have formed. Groups have disbursed loans to invest in fertilizer, storage for rice, and additional farmland that enhances productivity and income. Others have engaged in trading grains or making and selling local drinks. A few groups have created bank accounts with the Commercial Bank of Ethiopia.
The growing demand for VSLAs in project areas is a clear indication that the VSLA model is working effectively. Since the first year, an increasing number of low-income earners want to join VSLAs. Although MEDA lacks the capacity to serve all individuals who are interested, some groups have taken this challenge into their own hands and have since formed independent savings groups within their own communities.
Saving Around the Globe
Today, the VSLA model is being adopted, celebrated, and refined worldwide. As proof, there are over 6 million people engaged in savings groups in 60 countries. For more information, please see the Savings Groups at the Frontier report, produced by the SEEP network. This publication provides provides both an in-depth historical perspective on savings groups around the world, and suggests the potential future directions of the movement.