INNOVATIONS IN RURAL AND AGRICULTURE FINANCE
Community-Based Financial Organizations: Access to Finance for the Poorest ANNE RITCHIE
FOCUS 18 • BRIEF 3 • JULY 2010 C
ommunity-based financial organizations (CBFOs) are user- owned and -operated groups that provide mainly saving and
lending services but may also offer other financial services such as insurance. These independent organizations are based in local communities, with local governance and management. CBFOs range in size. They can take the form of informal and unregistered groups of five to seven people, usually women, who meet weekly to save small amounts of money that they then lend to each other and possibly to other members of the community. They also include larger, slightly more formal groups of up to 40 people who have written by-laws, and they include small financial cooperatives. CBFOs flourish among people who have poor access to banks and nonbank financial institutions such as microfinance institutions (MFIs).
Market niche
The market niche served by CBFOs is the unbanked poor. In many countries, locally organized CBFOs, such as rotating savings and credit associations (ROSCAs), have served as financial intermediaries for their communities for generations. ROSCA members save a predetermined amount of money regularly. In each period, one member of the ROSCA receives the funds collected. ROSCAs thus allow people to accumulate, through small regular savings, a large lump sum that is available for investments, such as creation or expansion of small businesses, children’s education, and home improvement. The main drawback of ROSCAs is that the money may not be available when needed because only one member collects the funds at one time.
Although MFIs formed over the past four decades have done a
great deal to make financial services available to the unbanked poor, they have not, for the most part, been able to reach the poorest people, especially those who live in remote rural areas. The poorest are able to save and borrow only very small amounts of money, making it too costly for banks and MFIs to serve them. In remote rural areas with widely dispersed populations, banks and MFIs often cannot cover the costs of an extension agent or a branch office, even if they use modern technologies to reduce costs or group people together to achieve economies of scale. Thus, MFIs have been successful in broadening the number of people served but less successful in reaching the poorest.
Successful models
Experience has shown that successful CBFO models must incorporate a number of basic principles: social cohesion of group members, a focus on building up savings to fund loans rather than relying primarily on external sources of funds, and an organizational structure that enables governance and management by people who are often poorly educated and have little or no experience with financial management beyond managing their own households and economic activities. Two models in particular appear to work well on a large scale and have good prospects for long-term sustainability. One model is the village savings and loan association (VSLA) model. Started in Niger by CARE International in 1991, the VSLA
adopted lessons from the efforts of poor local women to save in this large, poor, sparsely populated country. Since then, CARE and other nonprofit development agencies have spread the model to 39 countries, the vast majority in Africa. VSLA groups, consisting of between 10 and 30 members, have simple rules that govern their savings and lending activities. Each member saves on a regular basis, and this money is then lent out at an interest rate and on loan terms decided by the group. Loans may be made to both members and nonmembers. Indeed, many members save but do not borrow and earn a good return on their investment through the interest charged to borrowers. At the end of a given period, usually a year, the savings and the interest the VSLA earned are distributed to the members, and a new cycle begins. The distribution feature of this model keeps the amounts of money that the members must manage at a level commensurate with their financial literacy. It also enables all members to receive a lump sum on the same date, often one that coincides with most members’ need for funds, such as an annual festival, the start of the planting season, or the date that school fees must be paid. VSLAs do not generally link with banks or MFIs because experience has shown that members’ savings are generally sufficient to meet their credit needs, and injection of external loan funds has caused many groups to fail. The self-help group (SHG) model, begun in India several decades ago, has become the dominant microfinance model in that country, especially for the rural poor. SHGs usually have between 10 and 20 members who save regularly and lend the money out to members only. The funds saved are not distributed back to members, but, rather, grow over time. SHGs in India often receive small amounts of seed capital from government or donors. They usually have an explicit goal of bank linkage, which has been facilitated by the high density of banks in rural areas and by a government policy stipulating that banks’ portfolios must include rural loans. Many SHGs belong to federations that provide them with access to external capital, technical assistance in areas such as accounting, and greater bargaining power with government and banks. As of 2007, India had approximately 69,000 SHG federations. The principal differences between the models are the following:
• VSLAs are self-contained at the village level, whereas SHGs link with banks and form federations with other villages.
• VSLAs distribute all savings and earnings back to members at the end of the year, whereas SHGs add new savings to existing savings with no automatic distribution mechanism. This difference makes VSLAs easier for nonliterate people to manage but allows SHGs to accumulate more capital for lending.
Matching CBFO models with communities’ needs
The design of a CBFO program should be responsive to prevailing local conditions. A number of factors should be taken into consideration, including the demand for financial services and the proximity of banks and MFIs. In poor rural areas with weak local economies dominated by subsistence farming and few new business
FOR FOOD, AGRICULTURE, AND THE ENVIRONMENT
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34