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

What is wrong with microfinance? Entry II

Forum: Microfinance club UK
Date: 29th May 2007, 5.45-7.30pm
Location: Barclays, One Churchill Place, London E14 5HP
Network link: Microfinance club

Discussion of new book taking a critical look at the affects of micro-finance and the impacts on the poor. These are notes from the session presented by the authors.

Overview:
Pace of Microfinance is like a machine that is running fast. It is time to have a look at the progress and re-appraise our actual achievements in order to counteract any exaggerated claims. The phenomenon has been fanned by the recent Nobel prize for Grameen Bank, and considerable interest has been raised.

In order to ensure that attention and funds are directed where they can make the best impact on poverty a re-evaluation is urgently needed. There is very poor quality of actual data available and a lot of the success of microfinance is anecdotal at best. However, estimates suggest that 500 million people have been affected by microfinance in over 100 million households

This talk sets out to provoke a number of questions, in service of a better solution for the worlds poor. Issues that were raised during discussions about mf:

• Promotes debt not savings, and does not offer a full financial solution
• Often excludes the very poorest, and even within schemes the poorest tend to have the lowest levels of improvement in favour of those with higher income potential
• Under utilised and does not combine with other community development services such as health/education
• Does not create jobs and so does not build a strong sustainable local economy, but does create self-employed informal workers
  

Pod groups
Microfinance loans are typically organized in pods with shared credit exposure, these pod effectively guarantee the loans of the whole group and have weekly meetings to collect debts and discuss progress

• Very time consuming for the borrower hours lost from working of childcare to attend sessions
• Drop-outs often face sever implications from society which has led to suicides and group conflicts not covered by press
• Promotes mistrust and self-policing attitudes
• A better model may well be individual loans as proposed in Grameen2.
  

Gender empowerment
Microfinance has high uptake from women (95%) and are considered to be more reliable due to higher levels of repayment. Studies from University of Maine suggest that MF adds considerably to a woman’s workload and they would prefer wage employment.

Women do tend to be sole traders in the informal market, often distributing goods for more wealthy individuals. As such they are unlikely to become employers and do not enlarge the local economy.

Women are easier to intimidate in the group, and can be subject to abuse. They are rarely given training to develop themselves and their “business”.

Cost of capital
Once the costs of administration and other supporting services have been added to the base interest rate the affect cost for a loan can be very excessive for the borrower e.g. 80%-100%.

Where as this is lower then other means such as money lenders, the implication is that the borrower is supporting a pyramid of costs including several highly paid support staff, loan officers etc. As a result microfinance is not suitable for some sectors, especially farming which rarely produces returns above 50-60%.

Economic model
MF is debt based, typical economic development begins with savings models and proceeds to leverage unused capital. There is no evidence of a sustainable economic system that began with debt. MF does not provide capital for small business or housing, the typical economy created is petty informal short-term sole trading, which is highly susceptible to shock.

Transparency
Poorly measured, with little rigour, rely on anecdotes and heart warming stories. “Repeat borrowing is often quoted as a success measure. So what we are really saying is that these people paid of their loans and then came back to borrow more. Is that success? The same behaviour can be seen with drug users yet we consider increasing need and dependency as bad."
Not enough data is available to look at the purpose of loans or track the progress of “Borrowers”, there is some evidence that consumption smoothing is a major use of mf, often to pay off money-lenders.

Jumping on the bandwagon
The current media attention could potentially be diverting attention away from better interventions for the poor. There is evidence of a considerable amount of money entering the system looking for investment homes. Potentially 20-70% of current funds are unallocated waiting for assessment. A number of new investment funds have entered the market with $7-10bn potentially in the pipeline from 90 new funds in 2007.

The poor of the world may not have the capacity to handle that volume of debt, and there is not that much effective demand for capital.

Notes:
Organization looking at helping progress rural farmers in Mozambique
http://www.technoserve.org/strategy-1.html

Useful links:
Purchase the Book http://styluspub.com/books/BookDetail.aspx?productID=165037
Microfinance club http://www.microfinanceclubuk.org/
Grameen Bank site http://www.grameenfoundation.org/
Personal blog

What is wrong with microfinance? Entry I

With my new Corporately Socially Responsible hat on, I attended a meeting last night of the Micro-Finance Club UK (The agenda being the title of this blog).

Having worked with Microfinance ("MF") in Angola and been exposed to it in Bangladesh, I was looking forward to a lively debate with interesting viewpoints expressed. But sadly no!


Winners and losers
Since Dr. Yunus's Nobel prize, I have harbored a growing disquiet at the amount of interest and attention MF has got. Whilst I acknowledge there are winners, I have also seen losers and I feel it is an area for discussion. All the current attention seems a distraction, that funds and creativity have been diverted from real needs.

In London, everyone wants a piece of the MF action and to have MF on your CV is suddenly very "bankable" experience. It is as if MF is the silver bullet and we don't have to think of a solution to the problem of poverty anymore. If she were here today; Marie-Antoinette may well have said "Let them have credit".

What is wrong with MF?
The meeting was held in the shiny glass corporate HQ of Barclays Bank and introduced by the Group Vice Chairman, who proudly announced that MF was "now part of the banks business strategy, not just philanthropy".

The speakers ploughed through their intelligent, thought provoking research to general heckling from the Armani suited and Gucci carrying Investment Banking audience. One of the most provocative statements the speakers raised was:

• "Repeat borrowing is often quoted as a success measure..So what we are really saying is that these people paid of their loans and then came back to borrow more. Is that success? The same behaviour can be seen with drug users yet we consider increasing need and dependency as bad."

Every question to the speakers was either an attack or a self-justification. One eldery gentleman, purple with frustration, jumped up and yelled "Tosh!!" (A terribly British word last uttered in public in 1853)

I am a big believer in open forum discussion, I easily slip into devil's advocacy and feel the need for all perspectives to be considered. Far from a debate, all I saw were closed minds, self-serving celebration and a desire for profit.

I left as early as politely possible, thanking the speakers on my way to the door. I am left with the sad impression that the biggest thing wrong with microfinance is to voice any criticism of it.