The Hottest Trend in Microfinance: Village Savings and Loan Associations
"Village Savings and Loan Associations (VSLAs), based in the community, are complementary to MFIs, tending to serve the very poor whose income is irregular and less reliable and who may not be full-time business people." -- Hugh Allen, founder, VSL Associates, and Mark Staehle, enterprise advisor, Chars Livelihoods Programme
According to a recent article in The Economist, village savings and loan associations (VSLAs) are "the hottest trend in microfinance." A basic type of banking based on savings as opposed to debt, VSLAs are "so successful that they are now spreading across Africa, Asia and Latin America -- savings groups now have 4.6m members in 54 countries."
One of the reasons that these schemes are so popular, The Economist suggests, is because the very poor are extremely cautious about taking on debt. And surely to see what debt has done to the rich world should be enough to scare anyone in developing nations. As various microfinance schemes such as microcredit and microinsurance continue to grow worldwide, VSLAs -- also known simply as "savings groups" -- are emerging as a low-risk method to reach the some 2.5 billion people around the globe who are currently “unbanked.”
LOW-RISK MICROCREDIT: LENDING TO YOURSELF
In a typical village savings plan, a small group of community members pool their savings and buy a share in a fund from which they can all take out a loan. The members also contribute a small amount to a "social fund," which acts as microinsurance, giving payouts to members who experience unforseen financial difficulty. Because these plans are managed by community members as opposed to microfinance professionals as in typical microfinance institutions (MFIs), there is more willingness to participate.
Additionally, mircrocredit attracts only a particular segment of the poor population -- primarily small business owners in urban areas. VSLAs, on the other hand, can reach poor people in rural areas who simply need a way to save for the future and manage costs. Interest rates for borrowers are typically 5-10% per month for a three-month loan period. And while that seems high, the rates are set by the collective and the interest goes back to all, with returns between 20-30% per year. Essentially, borrowers are borrowing from themselves.
TARGETING PLACES WHERE MFIs DON’T GO
"MFIs that target the rural poor are challenged by a limited demand for credit and high delivery costs," according to VSL Associates, a microfinance consortium based in the United Kingdom that has developed VSLA models in Africa, Asia and Latin America. "As a result it is hard to service this market."
"There is also a gap between the financial products that MFIs prefer to offer and those that are needed by the very poor. While MFIs stress credit, it is savings that improve household cash-flow management and are a better fit for this clientele, which prefers to minimise risk by limiting its exposure to debt."
In addition to VSL Associates, some of the key organizations that have promoted VSLAs include the Aga Khan Foundation, Catholic Relief Services, Oxfam International, Plan International and CARE International, which started the first VSLA in Niger in 1991.
SAVING MONEY: A SUSTAINABLE TRADITION
"What makes the Village Saving and Loan model unusual is that it attempts to build sustainable traditions rather than sustainable institutions," says Stuart Rutherford, a visiting research fellow of the Institute for Development Policy and Management at the University of Manchester and founder and chairman of SafeSave, a financial services cooperative that provides savings and loans services to urban and rural poor in Bangladesh.
There is a Nigerian proverb that says, "Wealth diminishes with usage; learning increases with use." With the spread of VSLAs, more of the world's rural poor will have an opportunity not only to test that adage, but to begin that important tradition that was born right after Greeks first stamped money in the 7th century BC: saving.
image: Bugongi Savings and Credit Co-operative Society, Bugongi, Uganda (credit: elFrank70, Flickr Creative Commons)