A major challenge for full financial inclusion is extension to the poorest households in rural areas. Even in the presence of access to mobile services, the lack of financial literacy, unawareness of available services, and very small initial savings capabilities severely limit take-up and utilization of financial services. Well-constructed informal savings mechanisms, such as VSLA’s, may contribute to closing some of these gaps.

What are VSLA’s?

Village Savings and Loan Associations (VSLA’s) provide reasonably safe and convenient saving and lending services to small groups of poor people, particularly in rural areas. They were pioneered in the early 1990’s by CARE International, on the assumption that the most important financial service for the poor is not first of all ability to borrow, but the ability to save securely. They are applicable to anybody with any capacity to save, no matter how small. More than six million people around the world currently participate in VSLA’s and similar groups. Although they vary in details, models such as those from CARE International and World Renew have (as indicated by some, but not all, studies) shown considerable success in improving livelihoods particularly in rural areas that are barely served at all by formal financial institutions. They are also often offered in conjunction with other development capabilities such as agricultural technology and health education and services. Impacts are often as much social (e.g. social standing of women) as they are financial.

VSLA Limitations

VSLA’s have limits though:

1. Since cash is retained locally in a strongbox, a point can be reached fairly quickly at which this is not a sufficiently secure mechanism for maintaining cash.
2. Group sizes are limited to 20-25 participants, and so financial inclusion even at this informal level within a community may also be limited.
3. Significant local economic shocks (e.g. a community-wide crop failure) can result in closure of VSLA’s because of the extensive interruption to savings.
4. VSLA’s still tend to include the more wealthy members of any community, because of the low ability (actual or perceived) of the poorest to save on a regular, rather than irregular, basis.
5. VSLA’s are entirely cash-based, and do not encourage or provide access to any other payment mechanism (e.g. electronic remittances or government transfers).
6. Borrowing is limited to the funds held by the VLSA. For income-smoothing purposes, and insurance against economic shocks (e.g. a death, health issues, bad harvest) they work well. But for a new micro-enterprise, access to external funds is often important.
7. VSLA’s are dependent upon trust in the leaders, and in larger participants, who could abscond with funds or dominate borrowing access.

CARE International, Plan and Barclay’s Bank have been exploring a model for transition from VSLA to formal financial services, initially in Uganda and Egypt. This seeks to link existing and new VSLA’s to the formal financial sector, by granting accounts and associated financial services to the VSLA group as a whole. The question with this model is whether it is sustainable in its current form – it is not clear that Barclay’s has any plans for it to be profitable. Enhancement with mobile and agency-based services might help, but are not in Barclay’s plans so far.

Other models are being explored, such as an early-stages initiative to create a Credit Union owned by the members of a number of mature VSLA’s in Zambia. The effectiveness and impact of such models could use some solid research and analysis. /

Design for Transition

Some VSLA’s (e.g. in Haiti) have access to MFI’s or banks, typically by allowing an external institution to hold the  group’s cash, and perhaps providing limited group-wide lending services. However, these are dependent upon group leaders having access to brick-and-mortar branches, and in any case I would characterize this as extension, rather than transition, in that it provides only a limited increase in services, but not full financial inclusion.

How should VSLA’s be designed to open the possibility of a natural transition at both group and individual levels to formal financial services? Traditionally VSLA’s and similar savings groups have been designed to meet immediate needs, without clear consideration of the possibility for later “graduation” to formal services. Without major change, it should be possible to significantly increase their potential.

1. Since lack of financial literacy is a key barrier to financial inclusion, the design of VSLA’s should focus on financial education not just for leaders, but for all participants. Even if verbal literacy is not present, the experience of saving, borrowing and repaying, and a basic understanding of the operation of the group and need for prudence and trust in leaders, will contribute significantly to utilization of formal services when they become available.
2. VSLA’s are often designed to be inclusive, sometimes proactively so, of women, older people, youth, and those with disabilities. This characteristic should be extended to address bias within formal inclusion programs. Successes and failures with these groups should be used to drive design of formal programs.
3. Intentionally linking VSLA’s to other community development goals, such as business formation, agricultural development, literacy and health management, increases the value not just of the VSLA but also of the formal financial services that follow.
4. Design leadership training and monitoring not just for the immediate success of the group, but also to be able to demonstrate discipline and safety to potential future financial partners.
5. Ensure the VLSA has a group charter that is acceptable to local financial institutions. Supporting NGOs should update their model charters in cooperation with interested institutions.
6. Introduce electronic record-keeping (e.g. using a mobile app) to provide a degree of savings and credit history, in addition to providing history and balance records for participants.
7. Engage a bank or appropriately licensed MFI as a potential future partner relatively early in the life of the VSLA, and leverage financial education resources and then a group-wide bank account as pathways to individual financial inclusion.

These are just ideas. The primary point is to design VSLA programs so that they can be a stepping-stone toward full financial inclusion, and to leverage VSLA’s to address some of the known barriers to full inclusion.

Graham Seel is a financial services consultant who volunteers with World Renew in the area of Improving Livelihoods. The content of this blog, and associated comments, reflects his personal views and is not reflective of the Norman Group, World Renew, the CRCNA, or any of its partners.