Questions to Hugh Allen on Village Savings and Loan Association (VSLAs)

Read this interview with Hugh Allen to lean how VSLAs can help poor people access a sustainable and flexible range of self-managed financial services.

1. What are VSLAs?

Vital Facts for VSLAs: Type of institutional model Focus (savings/credit) Savings-led Main products Savings, internal short-term credit and small-scale insurance Outreach Estimated number of clients/members About 2 million in 22 countries worldwide. Most programs are less than 7 years old. Geographical presence (continents/countries) Mainly in Africa, but also in India, Bangladesh, Cambodia, Peru, Colombia and Ecuador Gender 70% of clients are female. This reflects the decision of many programs to work only with women. Percentage of rural/urban clients 95% rural, due to implementing organization bias/goals. Works well in urban areas (Nairobi and Luanda) Savings facts Estimated total number of depositors 2 million Estimated total value of savings($) N/A Estimated average savings amount per saver ($) Varies tremendously. As little as $0.1 per week in Niger and as much as $5 per week in Nairobi and Mozambique. Professional groups (e.g., teachers) can save as much as $20 a week. Loans facts Estimated total number of borrowers 1.3 to 1.5 million. About 60-70% of the total membership take loans in any one cycle, but this varies between countries. Estimated total volume of loans($) N/A Estimated average loan amount per borrower ($) $10 after 1 year, rising to $25 -100 after 3-4 years Financial performance PAR > 30 days Mid annual cycle: about 15-25%. End of cycle: loan losses of 1.5% or less Write-off ratio ±1.5% ROI or Financial self sufficiency ROI ±40%. Sustainability inherent to the methodology. 99% of groups are financially sustainable after 2 months. Operating expense ratio Not relevant. Costs are close to zero. VSLAs calculate their effectiveness and efficiency on yields to member savings which vary between 20-60% and average about 40% p.a. on the final balance of savings.

Results to date with the VSLA program VSLAs are being created by many different institutions: CARE was the pioneer (MMD in Niger since 1991), but now CRS, Oxfam, Plan, the Peace Corps and World Vision use the approach.2 Best estimates of client numbers today are shown below, but may be far larger, since many organisations implementing VSL do not report to any central database. Countries Number of clients Countries Number of clients3 CASHE India4 1,250,000 ± Afghanistan 10,000 Niger 229,000 ± Swaziland 10,000 FSDU Uganda 128,000 Sierra Leone 7,500 Mali 92,000 Angola 6,000 Zimbabwe 90,000 Eritrea 6,000 Tanzania 90,000 South Africa /Lesotho 4,000 Mozambique 30,000 Senegal 3,500 Cambodia 29,000 Benin 2,600 Kenya 25,000 Burkina Faso 1,500 Rwanda 33,000 Ghana 1,500 Ecuador 20,000 Togo 1,200 Malawi 19,000 Zambia 1,000 CLP Bangladesh 15,000 Sudan 500 Ethiopia 10,000

A VSLA is a self-selected group of around 10 to 25 people who invest their savings in a loan fund, from which members can borrow. Interest-bearing loans are initially provided for 1-3 months but, over time, may increase to six months or more.1

Members can save in different amounts, varying their contributions according to their disposable cash, and may withdraw their savings whenever they wish. Loans are paid back in an agreed period of time, but at a rate of the members' choosing.

VSLAs are independent and self-managed. All transactions are carried out at meetings in front of all the members, to ensure transparency. All the terms and conditions relating to financial transactions are decided by the members. To ensure that transactions do not take place outside the regular meetings (and that passbook records are not altered), a three-lock cash box, is used and the keys held by different members between meetings.

At the end of an agreed period (usually a year), the accumulated savings and interest earnings are shared out amongst the members in proportion to the net amount that each has invested. Thus, all of the original capital and interest earnings stay in the community (which is not the case with MFIs). Members consider this to be one of the most attractive features of VSLAs. Annual returns on savings average 40%.

A VSLA works well in remote rural areas, but also very well in urban areas.

2. How do VSLAs compare to Self Help Groups (SHGs)?

VSLAs are similar to SHGs, but differ in three respects:

Independence

VSLAs are rarely linked to external sources of credit, while most SHGs borrow from banks to increase the size of their loan funds.

Simplified record-keeping

To eliminate the need for external technical support and improve transparency, simplified systems of record keeping are used. These are based on witness (members observe all transactions) and the use of individual passbooks. No ledgers are needed, although the closing of cash balances is usually recorded.

Time-Bound

VSLAs share out their entire stock of capital and accumulated profits at the end of an annual cycle. Some may be re-invested in the subsequent cycle, but large amounts do not usually accumulate. This approach simplifies financial management and reduces the risk of fraud. Over time, however, large amounts may be mobilized. VSLAs older than 4-5 years routinely manage portfolios in the $2-5,000 range, with some managing up to $10,000. This may call into question the need for external capital.

3. What role do VSLAs play in providing poor people with savings services?

Savings are a VSLA's reason for being. Poor people are acutely aware that credit is a liability and, failure to repay can threaten their livelihoods. Savings, on the other hand are a resource that protects assets; provide a source of investment capital and cover emergencies: all of which reduce shocks to livelihoods. In the early years of a VSLA's life members use only their own savings to finance the loan portfolio, and use credit mainly to manage household cash-flow.

4. How do/should VSLAs and SHGs relate to the rest of the MF sector?

Most of the poor in Africa live far from the nearest bank/MFI, which in any case doesn't usually offer savings service. This makes loan-taking and repayment on a fixed schedule problematic. If you accept that most of the rural areas of Africa are decades away from having a bank around the corner, community-managed institutions such as VSLAs can provide an adequate level of service when the amounts involved are small and the products are straightforward.

Caution today

There is a widespread belief in the need to link VSLAs to banks. This facilitates external regulation and access to larger amounts of loan capital: but there is no compelling proof that either is needed (however much desired).

External regulation is neither practical nor necessary, since meetings are, in effect, a form of ongoing audit: VSLAs are powerfully self-regulated and usually have excellent portfolio quality.

It is commonly believed that very poor people want to take larger loans than a VSLA can provide, to invest their way out of poverty and must therefore be given access to external finance to increase loan sizes. But this is rarely the case. Instead of assuming that vulnerable people are keen to take on risky debt, we would, I believe, be better advised to help them save (which they usually prefer) and borrow in small amounts to facilitate a more efficient flow of intra-family cash. This seems to work for 90% of potential clients (and for most development practitioners as well). For those who are entrepreneurial and find this inadequate, MFIs and banks, with access to larger pools of capital, may be a better bet.

VSLAs Tools How do they simplify record keeping and improve savings management and security?   Member Share Passbook The basic tool that we've developed is the Share Passbook. This is a very simple book used to record shares bought and loans taken. Shares are issued in the form of stamps to simplify contribution calculations and to simplify the share-out. The passbook is designed to be used with the barest minimum of financial literacy. The system allows people to save in different amounts at different times, and, crucially, to freely withdraw their money on demand. Transactions are witnessed, so there is no need to write them down in painstaking detail. Instead, only individual assets, liabilities, and cash balances are recorded.   MIS The MIS is a program-level system that allows a program to know what its Field Officer/Agents are up to, and it helps to identify strengths and weaknesses of field personnel and specific groups. It also allows for ratio analysis of performance efficiency and it collates all the results into a single-page master report. It is not necessary for groups to supply any data that they don't themselves use in day-to-day management.

Ambition in the long-run

Having said this, it remains likely that VSLAs will increasingly be seen as a means by which external capital can be channelled to entry-level borrowers, if only because practitioners insist on it, and MFIs need to increase portfolio scale. This being so, we suggest that implementing organisations develop codes of practice and consumer education.

Practitioners may want to consider the following principles:

• Don't lend to VSLAs for at least two years: let them develop experience and confidence in managing their own money.
• VSLAs should be the borrower: not individual members. That way it can offer more flexible services, make a profit and retain its independence.
• VSLAs should not allow the lender access to information on individual loans made by the association to its members.
• Members' savings should not be used as collateral for an external loan.
• The first loan taken by an association should not exceed the total value of all members' paid up shares and, in subsequent cycles, never more than 3 times the value.
• Loans to VSLAs should be reimbursable on flexible terms, usually at the end of a 1 year loan cycle as a single payment, or, in varying amounts throughout the loan repayment period.

5. What are the benefits of VSLAs for clients, donors, and governments?

Clients

Clients receive accessible, low-cost, profitable, sustainable, safe, and transparent service, with nearly all of the interest retained in the community, paid back to members as a lump sum annually. Additional benefits are that people can borrow on flexible terms and conditions. Perhaps most important is the social support network provided by a VSLA.

No other type of financial service provider can match the return on equity of a VSLA, but a VSLA cannot provide large long-term, low-cost fixed-asset loans; for those, alternative, more formal institutions (such as MFIs or banks) are essential.

Donors

VSLAs are a low-cost way of providing sustainable, entry-level financial services to the most marginalized, to whom they offer a much wider range of economic and social options. They are also a vector for other development interventions (such as HIV/AIDS services/information).

The principal role of donors should be to avoid repeating established research and instead channel serious resources into programmes that seek to create a lot of VSLAs at low cost. This means funding demand-driven national-scale programmes.

Donors may also help to refine the Village Agent outreach model. This promising approach creates and sustains a permanent, self-financing community-based skill-set in VSLA training throughout any given region, and then leaves the VSLAs alone to self-replicate. Helping agencies to figure out the most effective way of creating these systems would be a valuable service.

Donors should also facilitate the development of a national consensus about best practice for VSLA/Bank-MFI linkage and seek to develop a code of practice and consumer education so that such linkages are safe and positive for both VSLA and lending institution.

Governments

Governments don't really understand VSLAs, tending to see them as a second-class service, or as something that needs regulation. Some have begun to see VSLAs as a way of winning elections (which is currently an emerging issue in Niger). In sum, gaining an appreciation of what VSLAs do and keeping the regulators at bay (for the primary community-level associations) would be a good start. Governments can then play a useful role in legitimizing VSLAs as local development partners.

Things to keep in mind Costs VSLAs are inexpensive! It costs, in large-scale African programmes, roughly $20-50 to create a VSLA client (half that in South Asia). And when the VSLA programmes close up and go home, VSLAs keep on being created.5 Scale National, demand-driven programs are the way forward--not small-scale efforts focussed on a geographically discrete target-group. Allow VSLAs to be VSLAs VSLA programme managers and promoters should be perfectly at ease with the notion of VSLAs being only what they are, without needing to be "apexed", linked to banks or made more complex. Before trying to create more sophisticated services, managers need to think hard about the trade-off between increased cost and complexity on the one hand and durable outreach on the other. But above all, they need to make sure that the proposed improvements are actually in demand and not just driven by their own assumptions. Keep it simple Designing and managing something complicated needs clever people. But it's a lot harder (although usually more effective and beloved of field staff) to keep things simple!

Related links:

• VSL Associates
• Village Savings and Loan Associations (VSLAs) Programme Guide
• CGAP study: Community-Managed Loan Funds: Which Ones Work?
• VS&L Impact Evaluation Malawi
• Impact Evaluation of Kupfuma Ishungu, Zimbabwe
• Village Savings and Loan Associations in Zanzibar

Hugh Allen has worked in development since 1970, focusing for most of the last 15 years on microfinance and technology-based market development activities. For 13 years he worked for CARE and was their Chief Technical Advisor for Small Economic Activity Development in Africa. It was during this time that he first came across the VSLA model and realized its potential. He founded VSL Associates to promote the adoption of community-managed micro-finance methodologies by multi-sectoral development agencies and southern NGOs. He is co-facilitator of the SEEP working group on Savings-led Financial Services and is on the faculty of the Boulder Institute of Microfinance and Southern New Hampshire University's Micro-enterprise and Development Institute.

1 Interest is referred to as a 'Service Charge'

2 Different organizations use different names: i.e. SILC (CRS); Saving for Change (Oxfam) and ASCAs (World Vision). PACT's WORTH programme, reaching over 200,000 in Nepal and working in 5 countries in Africa is not listed here, because the data are not currently available. WORTH was developed independently from VSL.

3 These figures apply only to CARE, CLP Bangladesh, FSDU Uganda, Plan, Oxfam and CRS.

4 The figure for India is ambiguous, because CARE and CRS are the two agencies responsible for this very large number and it is, basically a SHG approach. Discounting SHGs the number is closer to 1 million at present.

5 The FSDU study in Zanzibar in 2006 showed a 258% increase over 4 years in the number of VSLAs, without a donor in sight. Once this is factored into the equation, VSLAs are extremely cost-effective.