Building the Village Bank (VSLA schemes)

Date: 12th July, 2007
Location: DFID, 1 Palace Street, London SW1E 5HE
Network link: Microfinance club

Hugh Allen gave presentation on: Community-managed Savings and Loan: Microfinance for the rural Poor – that promotes sustainable financial interventions and consumption smoothing.

Village based savings and loans schemes (VSLA) are designed to empower local actors to form collective financial solutions for those excluded by mainstream financial systems.
The most vulnerable members of society often have need for savings mechanisms and insurance first rather than loans available under micro-finance schemes. VSLAs mobilise communities to manage their own savings businesses to members who act as a cooperative. Offering savings, loans and insurance.

VSLA features

• Typically 20-30 members
• Schemes have fixed lifecycle 12 months distribution
• Informal association no legal entity or contracts
• Rules defined by community with assistance from “trainer”
• Savings amounts variable and monitored by stamps

Success rates

• High survival rates 70-95% after 2 years
• Zanzibar - after 4 years of program ending 43 associations survived and 113 new ones had begun
• Niger - 94% of the 8,000 associations survived
  India has approx 1.25 million operational schemes and Africa approx 0.6 million
  

Success factors

• Limit all external involvement where possible and focus on enabling the community to form own rules and practices
• Train the trainer model used to increase sustainability and decrease costs in the field
• Uses informal process and structures that have limited reliance on literacy or education levels such as: Physical group witness, transparency and physical passbooks
• Levels of leverage on loans are kept modest from 20% initially up to 85% after 12 months

Social impacts
51% increase in asset ownership by women
48% reduction in use of interest based external finance (Microfinance)
83% increase in community based group activities

How is it delivered?
The program is delivered by using a system of village agents who are centrally trained and supervised. These agents receive fees on a service basis as agreed by the community. Training is undertaken on a train the trainer basis and becomes self-sustaining after 2 iterations. Typical one-off set-up costs range from $20-60 per participant although $10 or less has been achieved in Bangladesh.

Upsides of VSLA
Safe and flexible
Simple and transparent to users
Concentrates on thrift and expenditure smoothing
Accessible and repeatable
Rules defined by community so culturally adaptable
Costs are kept down as external experts are not used
Users can be members of both microfinance and VSLA schemes

Down sides of VSLA
No ability to provide enterprise development
Limited scale and range
Limited term which does not allow for long term accumulation of savings
Considerable pressure from external sources to formalise and regulate
Tendency for Microfinance schemes to absorb schemes which has typically resulted in excess leverage and failure

Useful links:
Microfinance club
http://www.microfinanceclubuk.org/
Savings and Loans impact report
http://www.clp.org.bd/Chars%20Livelihoods%20Programme_files/H.Allen%20Trip%20Report%20Revised.
Care International
http://www.careinternational.org.uk/Savings+and+Loans+7526.twl