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Village Savings and Loan Associations (VSLA)
Why a New Microfinance Model is Needed:
While microfinance is becoming a mature industry in many parts of the world it has proven largely unable to penetrate remote rural areas because the costs of doing so are high and the demand for credit quite restricted. Most of the people who live in rural areas and in urban slums (and particularly the very poor) receive no services. Thus, there is still a very large gap between the needs of the poor for financial services and the ability of banks and MFIs to provide these services. Moreover, the gap cannot be filled by these types of institutions because in most cases they will never be able to cover their costs.
The VS&L Methodology:
The Village Savings and Loan (VS&L) model is a savings-based approach that has proven on a very large scale that it can substantially fill this gap. By intermediating small local pools of capital to satisfy household cash-management needs it provides immediately sustainable and profitable savings, insurance and credit services to people who live in places where banks and MFIs do not have a presence.
What, then, is VS&LA?:
A VS&LA is a self-selected group of people, (usually unregistered) who pool their money into a fund from which members can borrow. The money is paid back with interest, causing the fund to grow. The regular savings contributions to the group are deposited with an end date in mind for distribution of all or part of the total funds (including interest earnings) to the individual members, usually on the basis of a formula that links payout to the amount saved. This lump sum distribution provides a large amount of money that each member can then apply to his/her own needs.
Members of VS&LAs receive a return on their savings investments that go from a low of 30% per annum, to a high in excess of 100% - far more than is paid by any commercial bank anywhere in the world. They are able to save when they need and in whatever amount they wish. They are able to borrow with a minimum of fuss, with loans and insurance benefits approved by their peers, and can obtain loans that range from small change to several hundred pounds. Typical loans are in the order of £10-20, which is far too small for MFIs to consider. Members are also able to receive insurance services, mitigating the effects of unforeseen disasters, and can set up funds for school fees, festivals and other predictable annual events.
VS&L is not a methodology that is designed for growth-oriented entrepreneurs. It is for the poor and the very poor and enables them to manage their household cash flow more efficiently and flexibly and to invest in income generating activities that secure and stabilise cash income. Its most dramatic impact is on self-respect and social capital, particularly amongst women, who form 70% of the membership.
The importance of VSLA to individuals:
• The VSLA program enhances individual savings and helps to promote a culture of saving within the community.
• VSLA provides an avenue for members to attain skills in business development. This increases the entrepreneurial capacity of members to do business.
• VSLA helps members start small business ventures. These include; selling of fresh milk, vegetables, second hand clothes, charcoal, mending of shoes, tailoring, small food kiosks, small clinics among others. These all help to enhance their standard of living. In addition it helps to reduce the unemployment situation of VSLA members.
• Income generated from the small businesses enable families to pay for school fees, meet medical bills, clothing, pay house rent, food and other daily costs. In addition, HIV/AIDS victims are able to afford anti viral treatment. This is very important and has broken the dependency syndrome among families.
• Members who are already in business get loans from the group and improve on the existing businesses. This increases the success levels of businesses.
• Members learn and adopt a culture of accountability and loan tracking. This is made possible by members themselves managing their businesses and their money.
The importance of VSLA to the communities:
• The culture of savings, loaning and skill development supports the government of Uganda’s policy of poverty eradication (PEAP).
• VSLA group members act as role models among the community. The model groups act as examples and learning groups for the entire community.
• Activities of VSLA lead to community development. This is seen where members who had a humble beginning increase their savings and begin to borrow from larger institutions like banks and then diversify their businesses.
• Vulnerable community members such widows, divorced or separated women, school drop outs etc have an opportunity to borrow and save without collateral security. This is not possible to the vulnerable at present. VSLA is therefore important in that its helps community members by reducing the problems associated with lack of collateral.
• VSLA acts as a village bank and therefore saves members from traveling long distances to access financial agencies like banks, micro finance institutions and other lending agencies.
• VSLA management is simple and can easily be run or operated by semi illiterate members.
(info provided from www.vsla.net):
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