Reaching the very poor: The need for a new microfinance model
Typical clients of Microfinance Institutions (MFIs) are the owners of established enterprises, who want to borrow to increase business turnover. They are mainly found in urban areas, where lending is profitable.
But MFIs that target the rural poor are challenged by a limited demand for credit and high delivery costs. As a result it is hard to service this market.
There is also a gap between the financial products that MFIs prefer to offer and those that are needed by the very poor.
While MFIs stress credit, it is savings that improve household cash-flow management and are a better fit for this clientele, which prefers to minimise risk by limiting its exposure to debt.
The assumption that the poor want business credit more than any other financial service is simply not true.
To reach the unbanked 2.5 billion adults worldwide, a new model is therefore needed that operates at very low cost and offers the right product mix: village savings and loan associations meets these important criteria.
The Village Savings and Loan Model
The Village Savings and Loan (VSL) model is a self-managed and self-capitalised microfinance methodology. By having its members mobilise and intermediate local pools of investment finance, it offers savings, insurance and credit services in markets outside the reach of formal institutions. The model was developed by CARE International in Niger in 1991 and has spread to at least 73 countries in Africa, Asia and Latin America, with over11 million active participants worldwide. We also know that spontaneous replication is taking place without the intervention of a facilitating agency, sometimes more than doubling the number of groups. Thus, the number of members is likely to be much greater than the 11 million cited. This will be updated in October 2015
- Women comprise 79% of the membership
- Repayment rates are the highest in the microfinance industry;
- 89% of groups continue to operate more than five years after receiving training, on average doubling their capitalisation and average loan sizes
- At any one time the average group has 63% of members with loans outstanding
- At any one time 74% of the available funds are in circulation as loans
- The average annualised return on assets is 28.5% (www.thesavix.org);
- The cost per member averages $22.2 (and as little as $8).
- 98% of members continue from one annual cycle to the next
VSLAs have altered the development equation in marginalised communities worldwide, providing members with the means to cope with emergencies, build capital and re-create social dynamics that support genuine self-reliance.
After a long period of scepticism, the microfinance industry has come to accept the place of VSLAs as an important part of the financial landscape and the most dynamic, affordable means of bringing entry-level financial services to the rural poor