The VSLA methodology

Summary

A Village Savings and Loan Association (VSLA) is a group of people who meet regularly to save together and take small loans from those savings. The activities of the group run in cycles of one year, after which the accumulated savings and the loan profits are distributed back to the members. The purpose of a VSLA is to provide simple savings and loan facilities in a community that does not have easy access to formal financial services.

A VSLA is a transparent, democratic and structured version of the informal Savings Groups found in many parts of the developing world. The main differences are that the VSL methodology emphasises accountable governance, standardised procedures and simple accounting that even the least literate, least influential member of the group can understand and trust.

Organisational structure

Groups usually hold annual elections. The roles and responsibilities of the five-person management committee are clearly defined. This is to encourage the participation of all members in the operations of the group; and, moreover, to protect the group from being dominated by a single individual.

Each group is composed of 10 to 25 self-selected individuals. Groups meet weekly and members save through the purchase of shares. The price of a share is decided by the group. At each meeting, every member must buy between 1 and 5 shares. The share price is set by the group at the beginning of the annual cycle and is fixed for the entire period.

Savings

The system is very simple, but the result is powerful.

Members do not have to save in equal amounts; these can vary at each meeting. Additionally, by saving more frequently in very small amounts, they can build their savings more easily, contributing to improving the security of the household.  People who are often excluded from participation in ROSCAs (Rotating Savings and Credit Associations) because they MUST save the same amount at each meeting, are able to join VSLAs because the amount they save is not fixed.

Loans

Savings are deposited to a loan fund from which members can borrow in small amounts.  These can be up to three times the value of their individual savings. Loans are for a maximum period of three months in the first year and may be repaid in flexible installments at a monthly service charge determined by the group. This flexible repayment system is a decisive advantage when compared to the rigid repayment demands of MFIs.

Poor people, especially those living in remote rural areas, do not usually have regular income, so accommodating their need to repay in varying amounts at irregular intervals is crucial.

Social Fund

Each group may decide to have a social fund, which provides members with a basic form of insurance. It is not mandatory. The social fund serves as a community safety net for a number of purposes – such as emergency assistance, festivals and funeral expenses. Members agree upon a contribution that must be made by all members at every meeting. The social fund is not intended to grow, but to be set at a level that covers basic insurance needs. It is not distributed back to the members at the end of the annual cycle, but remains a group asset.

Record-keeping

Each member has a simple passbook in which their savings and loans are recorded. While the VSLA does not keep a group ledger, it maintains a simple centralised note-book in which the closing cash  balances of the Loan Fund and Social Fund are entered at the end of each meeting. The members are expected to remember this at the next meeting.

Security

The materials, passbooks, loan fund and social fund of the VSLA are kept in a lock-box, which is safeguarded by the group Box-keeper between meetings. The lock-box has three padlocks and the keys are held by three members of the group who cannot members of the Management Committee. The system is robust and ensures that there can be no manipulation of the group’s passbooks or funds outside of group meetings.

'The Cycle'

Groups normally operate in one-year cycles. At the end of every cycle, the accumulated savings plus service charge earnings are shared out among the membership in proportion to the amount each member has saved. The annual share-out resolves any outstanding issues and builds confidence in the system. It is an 'action audit' that provides an immediate verification to all members that their money is safe and the process is profitable.

After the share-out, members who do not wish to continue may leave the group and new members may be invited to join. Members who plan to continue to the next cycle can re-invest any amount they wish of their shared out money in the loan fund for the next cycle. This initiates lending activities with a useful amount of money on hand.

When a new cycle begins, members conduct new elections, review their constitution and may make changes to the conditions that apply to savings, lending and the social fund. They may, for example, agree to change the social fund contribution, share price or the monthly loan service charge. However, the share value and loan service charge can never be changed during the cycle. After this process, the group then continues to operate independently in its second (and future) cycles.

Compliance with Sharia (Islamic law)

Both CRS and VSL Associates now publish versions of their training guides that are Sharia compliant.  They can be downloaded from this website.


Pictures from VSL Associates' field visits

1.  NUDIPU Uganda

2.  ESDC Palestine

3.  CARE Cambodia

4.  CARE Uganda

5.  CLP Bangladesh

6.  Oxfam Mali