opportunities, VSLAs can provide an effective way for households to manage their financial resources. Savers are able to earn a return on their investment by making their capital available to those with viable businesses. If banks and MFIs are distant, as in the rural areas of many African countries, attempting to foster bank linkage may be more expensive than is warranted by the limited demand for loans. In areas with more vibrant economies and greater population


density, the bank linkage and federation aspects of the SHG model enable groups to draw on external funds for the growth of members’ businesses. Federations can help SHGs with financial management and may also offer training aimed at strengthening the SHGs. However, because both the bank linkage and federation aspects of the SHG model add significant levels of complexity, external support from a technical-assistance provider may be required for a long period of time. Both VSLAs and SHGs are initially formed and nurtured by


trained extension agents. Experience with both models has shown that once the model has been established in a particular area, setting up new groups can be less expensive because members of existing groups can spread the model to other communities through informal linkages between communities or through the formation of associations of trainers who are themselves group members.


Leveraging finance and partnerships with mainstream financial institutions


The question of external financing has generated great debate. Many CBFOs have failed following the infusion of donor or government funds into fragile young organizations lacking the skills to manage this money. External credit may also draw into the membership people whose main objective is to obtain a slice of donor largesse rather than to contribute to the slow but steady buildup of the group through its own efforts. Yet it is precisely these efforts that are needed to build effective governance and management. Nevertheless, partnerships between CBFOs and mainstream financial institutions can be beneficial, especially if implemented incrementally. In the simplest form of partnership, CBFOs may bank their excess savings and earn interest on these savings. As the relationship develops, the bank or MFI is able to assess the capacity of the CBFO to manage its own funds. In a World Bank–supported project in Sri Lanka, rural banks have been eager to develop


relationships with CBFOs, which provide banks with easy access to a large number of rural customers. In some cases, the banks have sent their representatives to the villages to open the bank accounts. Such confidence-building measures can, over time, lead to a willingness on the part of the bank or MFI to extend credit to either the CBFO (for on-lending to its members) or to individual members who have viable business plans.


The way forward


The ability of CBFOs to govern themselves effectively and to manage their operations so that savings are secure and loans are repaid is paramount for their long-term sustainability. Donors and government can add value by funding programs that train local people to develop viable groups and by providing technical assistance for the development of simple governance, operational, and accounting systems that can be implemented locally. Donors and governments should also fund program


evaluations, using performance criteria that allow comparison across programs and models. The single most important performance indicator is repayment performance—that is, the ability of CBFOs to get borrowers to repay their loans in a timely way. Nonrepayment of loans is the greatest threat to the financial sustainability of any financial organization, including CBFOs. This threat is increased by the tendency of donors and governments to provide CBFOs with large loan funds that are beyond their capacity to manage effectively. Significant amounts of external funding— beyond small seed funds that help groups get started—should be linked to their performance in managing the group’s own funds. This careful approach will enable CBFOs to develop a strong foundation that enhances their prospects for long-term sustainability. n


For further reading: J. Murray and R. Rosenberg, Commu- nity-Managed Loan Funds: Which Ones Work? Focus Note No. 36 (Washington, DC: Consultative Group to Assist the Poor, 2006), www.cgap.org/p/site/c/template.rc/1.9.2577/; A. Ritchie, Community-Based Financial Organizations: A Solution to Access in Remote Rural Areas? Agriculture and Rural Development Discussion Paper 34 (Washington, DC: World Bank, 2007); APMAS, www.apmas.org/; Gemi Diriya Foundation, www.gamaneguma.lk/sub_link_view. php?doc=19; VSL Associates, www.vsla.net/.


Anne Ritchie (AnneFRitchie@aol.com) is a World Bank microfinance consultant. INTERNATIONAL FOOD POLICY


RESEARCH INSTITUTE Supported by the CGIAR


www.ifpri.org


sustainable solutions for ending hunger and poverty Supported by the CGIAR


www.worldbank.org Copyright © 2010 International Food Policy Research Institute and the World Bank. All rights reserved. Contact ifpri-copyright@cgiar.org or pubrights@worldbank.org for permission to republish.


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