Recently Hugh Allen, CEO of VSL Associates, spoke at Morgan Stanley for the Microfinance Club UK
What the Village Savings and Loan Model entails is the creation of savings groups to encourage community-managed savings schemes for those who do not have access to the services of commercial financial institutions. In fact, VSL has been used by CARE primarily in areas of extreme poverty.
This savings group consists of members who want to join, contributing to a pool of funds, from which they can also get loans at an interest rate that they have agreed on. The VSL model is time-bound and the collected savings are shared out at the end of the year, when people commonly need the extra funds, which, from an operational point of view, also simplifies the reporting system.
In order to support these savings groups, Allen found that, on average, it costs agencies around $23 per member assisted and that the average saving per year is about $34.6. In 2010, approximately 1.5 million people were saving using the VSL model and today there are over 6.2 million members of this type of savings group around the world.
The VSL model is powerful proof of the poor’s will to save. Allen said that often there is a myth about savings groups’ capacity to gather a useful amount of investment and that it is looked on as a second class type of service. However, with his research on the savings groups he proves that the retention rate is very high and that the trend to save through similar models has been growing rapidly.
Moreover, Allen noted, he is sceptical about people accumulating debt through the microfinance industry and that in order to change the perspective from “savings and debt” to “savings and credit” there has to be a shift in the savings group model. The research Allen and his team conducted was a panel study of 25% of all savings groups in six countries and aims to assist organisations to analyse their performance internally, compare results with others, generate consensus on norms and prove the power of savings groups, especially to the donors.
Through the study, Allen discovered some interesting facts; such that only about half of the members demand loans and that loans outstanding had dropped, since on average they are saving 150% of their loans. More information can be found on the Savix website.
In all, because the VSL model is a self-managed, independent type of microfinance, which does not produce revenue for the supporting agencies, it appeals more to the likes of NGOs, rather than the commercially-driven microfinance institutions. That said, consider that savings groups are one of the few extensions of financial services that can apply to areas where there is no infrastructure, or backing of a registered financial institution and yet people can encourage one another to save and plan long-term within their own means. I believe this model to be an obvious form of self-sustainable development at the community level that should be promoted. In the future articles, I will explain how these savings groups also work in situations where people are not living in extreme poverty.