The African economic system has been generally assessed as a predominately receiving structure rather than a producing one, and its financial role in the growth process of the continent is commonly underestimated. As a matter of fact, the effective role of external financial aid throughout the whole African continent can’t be denied, and even though the methodologies applied by certain development programmes have raised many discussions in terms of participatory practices and duration of their impact, the benefits triggered are generally positive and profound.
Village and Savings Loan Associations (VSLA) is a noteworthy microfinance initiative, mostly based in rural areas, and derives its origin from another already existing informal microfinance group that is Accumulating Savings & Credit Associations (ASCAs). VSLA were established in 1991 by CARE, a well-known humanitarian organization fighting global poverty.
What CARE observed was an invisible barrier between villagers and both finance and microfinance institutions. The barrier was generally composed by a wide variety of elements as the physical distance between villages and banks, the lack of know-how in terms of loans and savings programmes (illiteracy is a major obstacle), and the lack of trust placed in financial institutions. What the villages needed was a self-managing form of microfinance.
Usually made up of 25 members, the VSLA meet once a week for open saving sessions. The amount of money saved is always kept in a box secured by three locks where the keys are held by three different members. In no circumstances is the box ever opened privately, it is rather unlocked during public gatherings of the association. Members are allowed to ask for a loan every month, but usually their demand has to pass through other members’ approval: the same members are the only ones entitled to set the amount of interests the demanding member should pay throughout the reimbursement period.
The two most appealing features of this microfinance system are the complete absence of initial funding needed from an external source and the non-existence of a financial structure. The saving group requires only one fundamental thing as a starting point: training. The training is mostly based on group-dynamics and record-keeping (that can be orally made as well), hence it has the potential to be easily replicated and spread by the ones already trained.
If the absence of a physical financial structure is certainly a valuable feature, at the same time it represents a remarkable drawback: the next step to further strengthen financial inclusion will be made by establishing a fully functional connection between microfinance institutions and VSLA. The process has already begun in Kenya where a productive partnership between CARE, Equity Bank and Orange Money, with a conspicuous funding from the Bill and Melinda Gates Foundation, has allowed villagers an enhanced financial inclusion through mobile technology.
When we look at numbers, this microfinance approach takes on a whole new significance. According to CARE data over the past few years 150,000 groups in 26 African countries have been successfully targeted by this initiative, reaching out nearly 3.8 million members.
150,000 groups in 26 African countries have been successfully targeted by this initiative, reaching out nearly 3.8 million members
VSLA represent an important step towards creating an active financial environment at rural level: while ensuring a wider access to loans and generating new savings opportunities, these microfinance groups are the glue that holds social groups together and are the source of a new financial inclusion process.
(Head picture: © RogerBurks)
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