The next step toward financial inclusion
The pace of global financial inclusion may seem rapid in light of technological advances and evolving banking services, but for the millions of East Africa’s poorest the journey has been slow and steady. CARE’s LINK Up programme has followed years of savings-led and client-centric financial management programmes, fostering independent rural VSLAs who pool their savings together and lend these funds to each other with relative ease. After this came the first phase of formal financial inclusion, as CARE formed partnerships with major financial institutions to ‘link’ the savings groups with banks via group savings accounts. The goal in this was to drive savings-led financial inclusion for the under-served, savings-savvy groups; to grow their understanding of financial concepts and grant them formal banking experience while avoiding the risks of microcredit-led inclusion.
In the final quarter of 2015, CARE and Equity formally opened a new dimension of their partnership, offering selected VSLAs credit products tailored just for them. For these groups, the loans represent a long-awaited opportunity to access funds beyond their internal capabilities and perhaps the final step towards total financial inclusion; for CARE, it is an opportunity to gauge the scalability and sustainability of group credit as a next step in savings-led inclusion; and for Equity Bank, this pilot could reveal a sustainable new market of credit-worthy Kenyans while also strengthening the business case for serving savings groups nation-wide.
Putting external funds to good use
The pilot for the Equity loan product was offered to a select few CARE-facilitated VSLAs in Western Kenya. The loans, the first of which were distributed in October and November 2015, have been delivered to mature groups that have active group savings accounts, high group savings rates and strong internal loan repayment history. The loan amounts range from GBP 650 to 2,000, and are distributed by and repaid to Equity Bank. CARE plays a supporting role in carefully monitoring the application, distribution and usage processes of the loans.
Unlike other credit products offered to savings groups, Pamoja Tujijenge comes with no pre-defined usage requirements; the loan is granted as a lump sum to the group, which then decides how the funds are distributed and used among the members. In doing this, the groups are able to use the additional funds as they have their own: financing internal business and personal investments, repaid into the group account with interest over a specified term. As a precaution against default, groups put up a collective collateral rather than individual – another feature setting the Pamoja Tujijenge apart from other group credit models, which often hold individual members liable for group default. Freedom of usage and collective responsibility for repayment both capitalise on the existing systems of internal lending and group accountability within CARE VSLAs.
Results and the road ahead
CARE staff recently visited seven of the pilot VSLA groups to discuss the impact the loan is having, how it is being used, and group plans for repayment. The brief investigation revealed universal satisfaction with Equity Bank staff and a solid understanding by groups of the loan terms and repayment obligations. All groups cited business activities as their primary use for the loan funds, such as business expansion, stock replenishment and purchasing equipment. All members also understood the significance of their role in expanding access to credit, and had strict plans for successful loan repayment.
Within the coming months, CARE and Equity will have 50 VSLAs accessing Pamoja Tijijenge loans representing between 1,000-1,250 members. With continuous support from both CARE and Equity Bank, the pilot can serve as an important precedent in the development of savings-group financial products in the coming year. Ultimately, the partners aim to develop a product that can be offered to all savings groups nation-wide, starting with the 1,500 VSLAs already using Equity’s group savings product.
A product of good timing
Equity’s savings group credit product is gaining momentum at an opportune time, as SG-focused financial products are gaining industry-wide attention and support from global players. At the SG2015 conference on savings groups and financial inclusion, the MasterCard Foundation announced the ‘Savings at the Frontier’ project: a US$16.7 million plan to develop financial products for savings groups in Ghana, Tanzania and Zambia. Such an initiative aims to achieve financial inclusion for the same demographics CARE has been targeting for decades.
As CARE has previously noted, VSLAs represent a substantial opportunity to promote financial inclusion while unlocking massive amounts of domestic capital and supporting economic empowerment for millions of low-income women across Africa. It is up to East Africa’s financial service providers to recognise this potential, understand the needs of savings group members and design products that suit their unique financial needs. The Pamoja group savings account and recent Pamoja Tujijenge credit product are two examples of a major bank doing this; CARE looks forward to sharing our collective results from the pilot programme in early 2016.