VSLAs: The three keys to financial security

by 11th Dec 2014
Milca (background, centre) makes a point during a meeting of her VSLA group Milca (background, centre) makes a point during a meeting of her VSLA group © CARE Kenya/Job Mainye

Village Savings and Loan Associations (VSLAs) are a key way to provide access to financial services for people living in areas which financial institutions typically ignore and where the cycle of poverty prevails. They do exactly what their name suggests: provide a way for a group of individuals in any community to save their money and to access loans. But the benefits don’t stop there: later on, VSLAs also serve as an onramp to formal financial services.

So how does this work for a typical VSLA member? Milca is a 24-year-old woman in Kobodo, a small town in Homabay District, Kenya. She is married with two young children and had been meeting her family’s basic needs solely on her husband’s income. Milca has hairdressing skills which she knew she could use to make some extra income, but she could not afford to start a business to use her skills.

Milca finds it very hard to save large amounts on a very small family income on which there are always lots of planned for as well as unexpected demands. She and her husband do not have, nor can afford to have, a bank account, and they have no access to borrowing money. Milca is like the 2.5 billion unbanked people across the planet, with no access to formal financial services. However, through the VSLA approach, Milca has put herself on a ramp to be able to access financial services appropriate to her needs and what she can manage.

Key 1 – savings groups

In March this year, Milca joined a VSLA set up with support from CARE. Milca along with two dozen others selected themselves and formed the group. The group was accompanied on a weekly basis by a trainer who taught them how to set up their group’s governing council as well as how to designate the reasonable minimum amount that each member could save on a weekly basis.

Through this group, any member was able to put aside savings equivalent to 5 pence each week or as high as 25 pence, according to the extra cash they had available for savings that week. Some groups set higher amounts but the group Milca joined felt that a minimum of 5 pence was the right amount for them. The members pooled their savings on a weekly basis. The members also contribute a small sum to a compulsory fund which is used to deal with emergencies faced by members. These are given as grants or as zero interest loans to any member in distress, decided on a case-by-case basis.

The saving process is quite formal: each group has their own special cash box, which has three padlocks, each with a separate key, each held by one of the three key-holders nominated by the group. The rules are strict: the group agrees that the box can only be opened at their weekly group meeting. Everyone’s savings are tracked by allocating them shares which are recorded in the VSLA ledger and their personal passbook.

Key 2 – low cost loans

Members of the group now have a methodical way of saving on a regular basis. The weekly pooled savings form a loan fund, from which members can borrow money at a rate of interest they themselves have set. All a member has to do is state the nature of their loan request and the amount needed and their peers serve as a loan review committee. Collectively they decide whether it is a good idea for their money to be invested in a small enterprise – or sometimes for meeting other needs – or if the repayment proposition for the loan is strong enough to ensure that it will be repaid. So Milca persuaded her group to lend her the money that she needed to start her hairdressing business. After giving out loans to multiple members, at the end of an agreed time period (often a year), the interest from the loans is then divided up among the group members in proportion to their shares – so the group members get a good rate of return on their savings.

Key 3 – access to formal financial services

After years of engaging in weekly savings and loans, the group funds grow so that they often give rise to security worries. Accessing other financial products can also become a concern for some members.

This is when groups start to look to a formal financial service provider to access a bank account to keep their funds safe. Also the account can help the group develop a financial identity and access other financial products offered by the bank such as credit. As some of the members start developing their micro-enterprises, their credit needs become larger and more complex than what their VSLA can offer.

As an individual, maintaining a bank account can be quite expensive given the amounts deposited and the transaction costs in accessing an account, whether it be distance or the actual fees. However, accessing an account as a group spreads the cost over two dozen or so people, making it much more affordable.

CARE therefore works with international and national banks and regulators to break down the barriers related to cost and KYC (Know Your Client) that normally prevent a group from accessing formal financial services. In time, Milca’s group will decide whether they want to open an account at Barclays Bank (whose Banking on Change programme with CARE and Plan has helped to set up this VSLA) or with another bank. They already feel that the financial education they received from their trainer has prepared them to evaluate whether it is a good choice…

Do VSLAs work for poor women?

Milca makes 500 Kenyan shillings (ksh) a week and has quadrupled her initial investment in a matter of months. Today she has a business worth 4,000ksh. This is just the start and she wants to keep growing: “I want to increase into cosmetics, and beauty therapy to increase the profit,” she says. Milca is able to invest her profits back into the business because her husband’s income pays for her family. She’s also told us that since she joined the group, things have improved at home: “At the start I didn’t know how to speak to my husband, but since joining the group my confidence has increased. I want to be a change agent (inspiration) for other young women.”

The impact of VSLAs

Over three years:

  • In Uganda, VSLA members’ monthly household income rose from $60 to $95.
  • In Rwanda, members’ spending on household assets increased by 300%.
  • In Tanzania, members increased their spending on children’s school fees by 76%.
  • In Rwanda, VSLA members running small businesses grew from 19% at baseline to 43% at the end of the project, and business investment grew by 339%.
  • In Uganda, 42% said they could solve problems themselves compared with 31% at baseline, while 63% indicated their husbands respected and valued their role, compared with only 48% at baseline.
  • In Rwanda, the average number of meals per day eaten by VSLA members rose from 2.1 to 3.2.
  • In Rwanda, the average amount members spent annually on healthcare increased from $5.60 to $10.30.

Source: Connecting the world’s poorest people to the global economy: New models for linking savings groups to formal financial services, CARE International UK, 2013

Gerry Boyle

I lead CARE International UK’s policy analysis and advocacy around value chains and dignified work. I originally joined CARE as the Senior Policy Adviser on Private Sector Engagement. With the advent of our new Global Programme Strategy which put a particular emphasis on women’s economic empowerment, my focus changed a little, although I still work extensively with issues in the private sector and with CARE’s corporate partners.

Until recently I spent a lot of my time on financial inclusion, now looked after by my colleague Fiona Jarden. I also co-chair the Bond Private Sector Working Group.  Immediately before I joined CARE I worked for Oxfam as Head of Business Relations for about three years, but the vast majority of my career was spent as a management consultant including being a consulting Partner at Deloitte, where for a time I led Deloitte UK’s Consumer Business consulting practice, serving many major multinationals. My original degree was in Law from Oxford University, and in 2008 when I left Deloitte I did an MSc in Philosophy and Public Policy at LSE.

One good thing I've read

Amartya Sen’s Development as Freedom. It provides a framework for many people’s modern understanding of what is development, based on a profoundly human-centred approach rather than anything instrumental. And to check whether one personally is doing enough to fight poverty, I recommend Peter Singer’s The life you can save: Acting now to end world poverty – it’s very clear and easy to read but very challenging! Finally, Ha-Joon Chang’s Bad Samaritans: Rich nations, poor policies, and the threat to the developing world is a very readable guide to economic development which argues strongly against many of the prevailing orthodoxies.

Email: boyle@careinternational.org

Twitter: @gerryboyle10