Village Savings and Loans: A Pathway to Financial Inclusion for Poorest Households in Kyenjojo district
For Africa’s poorest and most marginalized households, few financial institutions exist to serve them, and where institutions do exist; they generally have inappropriate products and services. To address the issue of financial inclusion and reach poorer clients, Association of Women Development Actors(AWODA) began promoting a savings-led microfinance model, called Village Savings and Loans Associations (VSLAs). The VSLA model is based on the belief that for the extremely poor, particularly women, and the best approach is to begin by building their financial assets and skills through savings rather than debt. The reality is most extremely poor households have neither the assets nor the skills to interact with formal institution, even those dedicated to reaching the poor. And when they do borrow from the VSLA, loan sizes are generally small and manageable. Our experience has shown that when households stabilize their cash flow and are able to meet basic needs, women can take out small loans to finance and expand income generating activities.
Through participation in a VSLA members can diversify their activities, plant additional crops and even add new income generating activities. At the same time, they are able to save and borrow in ways that allow them to smooth cyclical household consumption patterns. Now more than ever before, we see VSLAs as an important, and often necessary, rung on the ladder of financial inclusion.VSLA methodology was adopted widely throughout AWODA in 2013 from 3 associations and currently to 30 associations in 2016. To date, the approach has spread to 900 direct clents in the subcounty of Butiti in Kyenjojo District.
How Village Savings & Loans Association (VS& LA) Model works
A Village Savings and Loan Association (VSLA) is a group of people who save together and take small loans from their savings. The activities of the group run in cycles of one year, after which the accumulated savings and the loan profits are distributed back to members. The purpose of a VSLA is to provide simple savings and loan facilities in a community that does not have easy access to formal financial services.
A VSLA is a more transparent, structured and democratic version of the informal savings groups found in villages and slums in many parts of the developing world. The main difference is that the VSLA methodology is a better organized and more accountable system that even the least literate, least influential member of the group can understand and trust.
Groups usually hold annual elections. The roles and responsibilities of the five-person management committee are clearly defined and highly decentralized. This is to encourage the participation of all members in the operations of the group; and, moreover, to protect the group from being dominated by a single individual.
Each group is composed of 20-30 self-selected individuals. Groups meet weekly and members save through the purchase of shares. The price of a share is decided by the group. At each meeting, every member must purchase between 1 and 5 shares. The share-price is set by the group at the beginning of the cycle and is fixed for the entire cycle.
The system is very simple; but the result is powerful. In a VSLA, savings is flexible across members and over time. Members do not have to save the same amount as each other; and they do not have to save the same amount at each meeting. Also, by saving more frequently in very small amounts, the poor can build their savings more easily; and this contributes to improving the security of the household.
Savings are maintained in a loan fund from which members can borrow in small amounts, up to three times their individual savings. Loans are for a maximum period of three months in the first year and loans may be repaid in flexible installments at a monthly service charge determined by the group. Each group may also have a social fund/ welfare, which provides members a basic form of insurance. The social fund serves as a community safety net and may serve a number of purposes – such as emergency assistance, festivals and funeral expenses – for the entire community, including group members and non-members.
Each group agrees upon a contribution made by all members at every meeting. The social fund is not intended to grow, but to be set at a level that covers basic insurance needs. It is not distributed back to the members at the end of the annual cycle, but remains a group asset.There is no group ledger or complex system of accounts at the level of the group. The closing balance of the loan fund is simply counted, announced, remembered by all members, and noted in a notebook at the end of each meeting.
In order to track the individual savings and loan liabilities of its members, VSLAs use a simple passbook that is appropriate for groups with limited literacy and numeracy skills. The materials, passbooks, loan fund and social fund of the VSLA are maintained in a lock-box, which is safeguarded by the group box-keeper between meetings.
The lock-box has three padlocks and the keys are held by three members of the group who are not members of the Management Committee. The system is robust and ensures that there can be no manipulation of the group’s passbooks or funds outside of group meetings. Groups operate in annual cycles. At the end of every cycle, the accumulated savings plus service charge earnings are shared out amongst the membership according to the amount each member has saved. The annual share-out resolves any outstanding issues and builds member confidence. It is an action audit that provides an immediate verification to all members that their money is safe and the process is profitable.
After the share-out, members who do not wish to continue may leave the group and new members may be invited to join. Members who plan to continue to the next cycle may all agree to use some of their savings to make a contribution to the loan fund for the next cycle. This initiates lending activities with a useful amount of money on hand.
When a new cycle begins, members conduct new elections, review their constitution and may make changes to the terms and conditions that apply to savings, lending and the social fund. They may, for example, agree to change the social fund contribution, share price and the monthly loan service charge. However, the share value and loan service charge can never be changed during the cycle. After this process the group then continues to operate independently in its second cycle
