Reaching the very poor: The need for a new microfinance model

Typical clients of Microfinance Institutions (MFIs) are the owners of established enterprises, who want to borrow to increase business turnover. They are mainly found in urban areas, where lending is profitable.

But MFIs that target the rural poor are challenged by a limited demand for credit and high delivery costs. As a result it is hard to service this market without subsidy or exploitative interest rates  and  MFIs either tend to  on urban and peri-urban markets or offer rigid and often draconian tterms

There is also a gap between the financial products that MFIs prefer to offer and those that are needed by the very poor.  While MFIs stress credit, it is savings that improve household cash-flow management and are a better fit for this clientele, which prefers to minimise risk by limiting its exposure to debt.

The assumption that the poor want business credit more than any other financial service is not true.  Most loans go to managing household cash-flow and not so-called 'productive' enterprise

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To reach the unbanked 2.5 billion adults worldwide, a new model was needed that operates at very low cost and offers the right products: Savings Groups (SGs) meet these criteria.  Initiated by Moira Eknes in CARE's Matu Masa Dubara (Women on the Move) project in Niger in 1991 variations of this methodology reach more than 20 million people worldwide, with about 2/3 using the VSLA model.

The Village Savings and Loan Model

The Village Savings and Loan (VSL) model creates self-managed and self-capitalised savings groups that use their savings to lend to each other.  VSLAs are comprised of between 10 and 30 members and offers self-managed savings, insurance and credit services in urban slums and remote rural areas.. The model has spread to at least 75 countries in Africa, Asia and Latin America, with over 20 million active participants worldwide.  We also know that spontaneous replication is taking place without the intervention of a facilitating agency, sometimes more than tripling the number of groups.  Thus, the number of members is likely to be much greater than the 17 million cited in July 2019


Key facts:

  • Women comprise 78% of the membership
  • Repayment rates are the highest in the microfinance industry;
  • 89% of groups continue to operate more than five years after receiving training, on average doubling their capitalisation and average loan sizes
  • At any one time the average group has 63% of members with loans outstanding
  • At any one time 74% of the available funds are in circulation as loans
  • The average annualised return on assets is 18%
  • The cost per member averages $22.2 (and as little as $8).
  • 98% of members continue from one annual cycle to the next

VSLAs have altered the development equation in marginalised communities worldwide, providing members with the means to cope with emergencies, build capital and re-build social interdependence and trust.

The microfinance industry has come to accept the place of VSLAs as an important part of the financial landscape as among the most dynamic methodologies that bring entry-level financial services to the rural poor, in their own communities, and managed by themselves, retaining capital in the community that wouold otherwise be shipped off to urban areas or remain too dispersed to be useful.

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