Do you know that of the developing world’s 1, 100,000,000 poor people, 800,000,000 of them live in rural areas? Will you debate me if I assert that this vast majority of poor people directly depend on agriculture for employment and income generation? How do you perceive the feasibility of bringing all these people into the economic mainstream? Those, indeed, are the million dollar questions begging for answers. Not just answers but positive answers.
Empirically, more than 60% of African economies depend on agriculture yet the continent suffers the plaque of food insecurity and chronic hunger .Conversely, developed countries like the US have less than 1%(approximately 2 million) of its population engaged in agriculture but are food secured, exported surplus to hungry countries. The point here is not the quantity but quality of the labour force engaged in agriculture in the two contrasting worlds. There are several limiting factor accounting for declining agricultural productivity in Africa. Notable among these major causes are the very limited access to resources, such as land, education, energy, farm services and credit.Today, I will focus on the pivot of all the causes: Credit.
Credit has become synonymous to banks and micro finance institutions. That could be right. But the question is how useful are these institution to boosting the rural economy?. Of course, banks and micro finance institutions (MFIs) provide valuable services to the poor in Africa.However, they are more successful in economically dynamic areas like the urban and Peri-urban centers where investment opportunities abound, income streams are diverse and regular, cost of reaching clients are low with high borrowing requirements of small scale enterprises.
But what is the case of the farmer that lives in the hinterland? How does the fish monger across the lagoon benefit from these financial services? Perhaps, the vegetable farmer has to continually produce on subsistence scale due to fragmented value chains and inefficient supply chain.
Increasingly, it is becoming evident that MFIs are of great disservice to those in the rural areas. Sometimes, they too cannot be blamed that much. Even large scale MFIs that are licensed to mobilize savings struggle to provide products that suit the small capital requirement and irregular incomes of their poorest of clients; many of whom may borrow from informal sources to support their repayment obligations to MFIs.What else could the poor farmer expect if not indebtedness. To poor farmers and rural dwellers, MFIs are best configured to serve growth-centered entrepreneurs whose income is diverse and reliable; who work full-time in their business; and who need access to large pools of capital to satisfy their demand for loans. What this means is that, automatically, rural dwellers with less reliable income and seasonal business cannot qualify for credits from these banks and MFIs.
However, there is a way out. This alternative is an organic approach to building a voluntary community-based and self-managed group of 15 to 25 individuals who meet regularly to contribute to their own savings. That is not all. The alternative generates savings which are maintained as a loan fund from which members can borrow in small amounts. It is flexible and compensates for the major weaknesses of MFIs that fail to provide remunerative and flexible saving facilities.MFIs, rather than building traditional informal financial systems, their approach often tends to replace these informal systems. This is a disincentive to rural dwellers. The feasible and practicable alternative to the lapses of MFIs is the Village Savings and Loan Associations (VSLAs).
Village Savings and Loan Associations (VSLAs) provide principal services that help its customers to manage their household cash flow as well as providing useful lump sums for life-cycle events which may or may not include income generation. It also provides a safe place to save, provides access to credit for emergencies and productive investment, and provides a social network at the same time building the social capital of its participants.
What is more, VSLAs unlike MFIs provide people no matter how remote or poor with a means of intermediate small amount of local capital on flexible terms, allowing people to transact frequently at very low costs.
The concept of VSLAs is not novelty in Africa. It had been experimented with in Niger in 1991 by CARE International.Ever since; its positive ripple effects caught the attention of other development organizations like Plan International, Oxfam, Catholic Relief Services and Aga Khan Foundation. In India, for example, there exist over 2 million VSLAs serving 30 million members. This is a positive proliferation and worthy of adoption by any development organization.
But how does one start a VSLA in his/her community? Let me walk you through the process involved.
1. Allow members to form their own groups.
VSLAs must be built on trust. As such, members should be allowed to select the people they could trust to constitute the group. The group should be between 15 and 30 persons.
2. Provide Basic Training to Establish the Terms of Operation.
Since most rural dwellers might not pride themselves with literacy, it is important that basic training be provided to bring all members at par. During the training, ensure that the following key issues are discussed, understood and accepted by all;
A. Define the purpose of the VSLA
B .Elect members to serve as officials
C. Set the terms for savings and loans including interest rates, repayment schedules and penalties for late payments or missed meetings.
D. System of collecting savings and making loans.
E. General meeting procedures.
NB: Your record keeping techniques should be suited for both literates and illiterate people.
3. Form a Transparent Executive committee.
Ensure that your VSLA elects a chairperson, secretary, treasurer,and two people who will count the money. This forms your executive committee.
Remind members to select three trusted people from among themselves who you would entrust each with a key to one of the three locks on the cash box where the group’s funds are kept. In this way, you have created an internal control system. Ensure that all transactions, from the collection of member’s savings to the disbursement of loans are carried out at weekly meetings in the presence of all members. Always and at all times see to it that the transactions are transparent and accountable.
4. Bingo! Provide financial services now.
Begin by collecting weekly savings from members. The savings are accumulated in the form of shares at a price agreed upon by the group. Once you have made sufficient savings, say four to five weeks of savings accumulation, go on to offer your members with loans. Based on the interest your group had set, let it apply to all loans.Also, at the end of the year; pay all members a return on their savings. This end of year returns is generated from the interest rate and all fees collected throughout the year.
5. Set up a Social fund; a miniature Insurance.
Since VSLAs are principally to keep members financially buoyant during hard times, ensure that you put a form of insurance in place. This would cushion members against vulnerable times.However, the entire group must determine if the emergency funds are distributed as grants or as interest-free loans with flexible repayment terms.
6. Conduct an Action Audit.
About 9 to 12 months after the formation of the VSLA, conduct an action audit whereby you pay out all members savings and earnings from interest and fee. You then close the books for year and disbands.Advisedly; your action audit should be scheduled to provide a lump sum to members at critical times in the year when access to money is needed, for instance, to pay school fees or inputs at the start of the agricultural season. This period also allows members to leave the group and new members to join. Do not be surprised when your group decides to reconstitute and resume the saving and loan process. It does happen and it is a sign of progressive entrepreneurs.
7. Monitor and Evaluate Progress of your VSLA
From the day you VSLA operations begun to the day you carried out your first action audit, keep your eye on the way things are progressing, support the executive committee in ensuring that proper books are kept.
With these seven formidable pillars you an erect a VSLA in your community. You want to know whether VSLAs are independent of MFIs. The answer is NO.Rather, VSLAs play complementary role to MFIs.VSLAs work at the grassroots to build the economic muscles of the people. With this, the people can build an appreciable capital base and credit-worthiness to attract MFIs.VSLAs therefore are the bridge that links the rural poor to the MFIs(if they so desire)comparatively,VSLAs have the advantage of reaching out to the rural poor, has a low operating cost, retains the capital within the group, its transparent, democratic and flexible, serves as conduit for other interventions, creates the opportunity for increased economic activity and above all ensures a low client debt level.
However, VSLAs are not without challenges. Principal among the lot is the limited capital base. Since VSLAs depend on the members limited saving capacity to provide the groups lending capital, loans demanded by members can outpace supply.
There is also the problem of limited product offering. Without a linkage to a formal financial institution, products within the group are limited to simple forms of savings, loans and insurance that may not match well the needs of all members.
Equally challenging is the situation of interrupted savings. The yearly distribution of savings and caps on shares interrupt members’ effort overtime to accumulate large amount of capital (although at the first meeting when the group reconvenes, savings can be reinvested at five times the normal weekly amount.)
The group could also suffer what is called elite capture. It is more common for more powerful group members to exploit the loan fund by taking more than their share of loans and by defaulting .A way to mitigate this has been to place a cap on the number of shares (savings) which can be purchased by any one member and by restricting loan amounts to multiples of shares held.
Also, there is the tendency of exclusion. Since the groups are self-selecting, there is the risk that members of the community will exclude poorer individuals from the group.
Of course, one cannot rule out theft. In VSLAs, cash boxes are maintained by the groups and may pose the risk of theft. In practice, with the exception of the first few weeks when group start to save and the last months when loans are being repaid, the cash box is nearly empty as funds are circulating among the members. To minimize risk, groups can be linked to banks which allow the groups to maintain savings accounts, particularly during the last few months prior to the action audit.
Meanwhile, the prospects of VSLAs far outweigh the challenges. These prospects spawn from some identified innovations which when applied could scale up the financial services to the poor.
Firstly, there should be linkages to financial institutions. It is perceived that overtime, some members may need more diverse financial services and/or larger loan sizes which cannot be met by VSLAs due to the limitations outlined above.Already,some development organizations have piloted linkages with formal financial institutions such as banks,MFIs and Credit Unions in response to the demands for a broader range of services.
Secondly, income generation should be focal to VSLAs.Without a doubt,VSLAs had been tremendously successful in poverty reduction and income smoothing.However,there are opportunities to enhance income generation and asset building.
Thirdly, sustainability and quality of service could also do the trick. When all other innovations become fully operational, sustainability and quality of services of VSLAs would be key. This is validated by the fact that some development organizations are testing models whereby field agents provide monitoring for a fee paid by the group. In another experiment,VSLAs were promoted to form Credit Unions and other larger registered body that can provide support like negotiating fees with banks and assuring quality standard.
Need I say more? The future of VSLAs is promising. If the farmer that sleeps on a straw mat could wake up in the morning and be assured of credit to purchase agro inputs, it would be because he belongs to a VSLA.
To this end, I implore the various development organizations to tap into the VSLA model to boost the rural economy, most especially in Africa.
If you work in a development organization and you want more education on VSLAs;perhaps you need a coordinator in the areas of economic and livelihood development, give me a call and let us synergize our expertise to better the lot of our people.
Be the change you want to see in the world.
NB: You can find my mobile number in my profile. Give me a call. Thanks