Village Savings and Loans: A Pathway to Financial Inclusion for Africa’s Poorest Households

For Africa’s poorest and most marginalized households, few financial institutions exist to
serve them, and where institutions do exist they generally have inappropriate products and
services. To address the issue of financial inclusion and reach poorer clients, CARE began
promoting a savings-led microfinance model, called Village Savings and Loans Associations
(VSLAs). The VSLA model is based on the belief that for the extremely poor, particularly
women, the best approach is to begin by building their financial assets and skills through
savings rather than debt. Through participation in a VSLA members can diversify their
activities, plant additional crops and even add new income generating activities. At the same
time, they are able to save and borrow in ways that allow them to smooth cyclical household
consumption patterns. Now more than ever before, we see VSLAs as an important, and often
necessary, rung on the ladder of financial inclusion.

Article
Full financial inclusion is generally referred to as a state in which all people have access to a
full suite of financial services, including most fundamentally savings, credit, insurance and
transaction accounts, but extending as well to more sophisticated financial instruments such
as pensions and lines of credit. Ideally these services would be provided by a range of
providers to ensure users receive services at competitive rates.
For Africa’s poorest and most marginalized households, financial inclusion is a long way off.
Few institutions exist in the rural areas, and where institutions do exist they often have
inappropriate products and services. The reality is most extremely poor households have
neither the assets nor the skills to interact with formal institution, even those dedicated to
reaching the poor. This paper looks at baseline data collected as part of an ongoing impact
assessment across three countries implementing large scale Village Savings and Loan (VSL)
programs: Malawi, Tanzania and Uganda. The baseline data provides evidence of the poverty
levels of target communities, and identifies the needs for and barriers to formal financial
inclusion in poor remote communities. When combined with periodic data collected on

Village Savings and Loan Associations (VSLAs) in those same communities, we gain
significant insight into how membership in a VSLA helps to change financial habits and
accumulate assets.

Background
Globally, microfinance has generally focused on providing credit to foster enterprise
development. Growing evidence highlights that for poor households (as with less poor
households), savings is a much higher priority than borrowing, as savings builds assets and
can help to address risks as well as planned lifecycle events. As documented in Portfolios of
the Poor (Collins et al, 2009), traditional places where the poor save money are often at risk
of theft or temptation.
To address these constraints and reach poorer clients, CARE began promoting a new model
for ensuring access to financial services through VSLAs. CARE’s VSL program is based on
the belief that for the extremely poor, particularly women, the right approach is to begin by
building their financial assets and skills through savings, rather than debt. By having access
to savings services and small loans, members can smooth irregular income patterns and meet
basic household consumption needs rather than taking on significant debt they may be unable
to repay. And when they do borrow from the VSLA, loan sizes are generally small and
manageable. Our experience has shown that when households stabilize their cash flow and
are able to meet basic needs, women can take out small loans to finance and expand income
generating activities. With female headed households representing 18.8% of the target areas
in which we work in, participation in a VSLA provides an important option for women to
build their financial skills to manage household cashflow and income generating activities
while creating a solid foundation to increase her ability to contribute to her household
economy.
Access Africa
The VSLA methodology was adopted widely throughout CARE in 2000. To date, the
approach has spread to 2.3 million people in 26 African countries notably: Angola, Benin,
Burundi, Cameroon, Cote d’Ivoire, DRC, Egypt, Ethiopia, Ghana, Kenya, Lesotho, Liberia,
Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, Sierra Leone, Somalia, South
Africa, South Sudan, Tanzania, Uganda, Zambia, Zimbabwe. Outside of Africa, CARE has
facilitated savings-led groups in Afghanistan, Bangladesh, Cambodia, Columbia, Ecuador, El

Salvador, India and Indonesia. In 2008, CARE embarked on a decade long strategic
investment to increase access to savings-led financial services in Africa through the Access
Africa Signature program. Access Africa focuses on expanding CARE’s Village Savings and
Loan Associations approach throughout sub-Saharan Africa. CARE’s focus on Africa is due
to the high percentage of the population living in extreme poverty, and the high percentage of
its population without access to financial services. Evidence from Latin America and Asia
has shown a strong correlation between inclusion in the financial sector and the reduction of
extreme poverty.
Financial inclusion generally refers to inclusion in the “formal” sector, i.e. having an
account with a bank, insurance company, MFI, or some type of regulated entity. Much of the
discussion around financial inclusion focuses on how to extend the reach of the formal sector
to include more people. Often in these discussions, the informal sector is seen as the sector
people need to move out of. We would argue that a policy on financial inclusion should focus
on ensuring the poor have convenient and affordable access to the financial products that
they need to manage their households and businesses. These products may come from either
formal or informal providers. As households and businesses grow, financial products offered
by informal providers may no longer meet the needs of the clients, and they would then move
into the formal sector (while often still accessing financial services through the informal
sector). We would encourage broader policies on financial inclusion that include the vital role
that the informal sector, particularly savings-led approaches, can play. In addition, we would
also encourage engagement in consumer protection policies as linkages between the formal
and informal sectors develop and many previously excluded access formal institutions for the
first time. An important part of consumer protection is financial literacy. Equally important is
the engagement of formal financial institutions in establishing and enforcing their own
consumer protection principles for this new client segment.
CARE’s VSL programs reach a segment of the population that is extremely poor and is
not reached by the formal sector. The challenge of microfinance has been to ensure the
poorest households are served. Often microfinance institutions focus on the economically
active poor, which tend to be less poor. This makes sense as MFIs are typically credit led and
focus more on enterprise development. Alternatively, VSLAs have proven able to reach
extremely poor households and communities. In recent baseline studies of CARE’s VSLA
program conducted by Innovations in Poverty Action (IPA) in Malawi and Uganda the data

paints a telling portrait of the communities targeted for VSLA programming. Under the Bill
and Melinda Gates Foundation funded Save Up program, CARE partnered with IPA to
evaluate the socio-economic affects of CARE’s VSLA model on households and individuals
in Malawi and Uganda. This impact evaluation uses the randomized controlled trial method
to provide evidence-based results and guidance to CARE regarding the promotion of access
to savings, credit and insurance through a savings led approach. It will be one of the first
rigorous and large-scale impact evaluations of access to savings for poor households. CARE
is also working with IPA to conduct a similar impact assessment on our VSL program in
Ghana.

Impact Surveys
In Malawi according to baseline data, 56.8% of the targeted implementation population lives
below $1.25 while Malawi’s National Statistics Office Household survey in 2005 reveals that
52.4 percent of Malawians live on less than $1.25 per day. Malawi and Uganda baseline data
goes on to depict that seventy-five percent of households own livestock valued at an
estimated $1643 on average per household, with these livestock representing the bulk of their
productive assets. Dirt feeder roads remain the main method of accessing communities with
distances ranging from an average of 14 kilometers in Malawi to 23 kilometers in Uganda
from the nearest tarmac road. Access to electricity is rare reaching an average 31.4 percent of
the villages targeted for VSLAs in Uganda and 36.7 percent of villages targeted in Malawi.
The baseline data provides key insights into access to formal financial services in the targeted
communities. In Malawi, 64.3 percent of household members reported having some form of
savings. The most common location for savings is the house where 82.8 percent of all savings
is kept with an average balance of $21.52. Savings at the home decreases steadily as you
move up the wealth quintiles. Banks and credit unions represent the second highest savings
with 8 percent of the savings with the average balance of savings accounts at $36.74.
However, for the poorest households, which are saving at home, they are only able to put
aside an average of $7.78 per year, and borrow an average amount of $21.37. Only 2.3
percent of Malawian adults in the study have taken at least one loan in the last year averaging
$47.79 (with women accessing an average of $29.44 per year). Sixty-seven percent of these
loans were obtained from a friend, neighbor or relative. The poorer quintile had taken 71.4%
of loans from their friend, neighbor or relative and households have taken an average of 1.6
loans during the past 12 months.

Statistics from the baseline data from Uganda show that 28.9 percent of adults have taken at
least 1 loan in the last 12 months averaging $79.62. 62.5 percent of these loans were obtained
from a friend, neighbor or relative. 17.8 percent were taken from a ROSCA and 6.7 percent
from a MFI or SACCO. Of these loans, 23.7 percent were taken for education purposes. In
second place, health related expenditures were the reason for borrowing totaling 19.7 percent.
However, amongst the poorest quintile, health ranks the largest proportion of loans taken.
Seventy-four percent of households have at least one member who saves with a range of 58
percent in eastern Uganda and 85 percent in western Uganda. The most common place to
save in Uganda is in the house where 63.1 percent keep their savings. Community based
savings clubs/groups/banks is the next most common with 27 percent.
VSLA groups have proven to be effective at ensuring all members have access to savings and
credit services. CARE’s MIS tracks both fund utilization rates and the percentage of members
with loans outstanding. In Tanzania and Uganda the percentage of members with loans
outstanding is 55 percent and 67 percent respectively, with both having average fund
utilization rates of approximately 77 percent. This demonstrates a good distribution of
available funds across members. In VSLA surveys conducted in both Tanzania and Malawi,
members report having taken an average of two to three loans per lending cycle (normally
about 12 months).
VSLA provides financial services in amounts that are generally too small and too
frequent to ever be provided by the formal sector. VSLAs essentially provide a simple,

community based commitment savings product with an option to borrow attached. Member-
Clients are able to save as little as 10¢ a week in some cases, and can borrow as little as $5.

Evidence shows that commitment products are some of the most effective for encouraging
poor households to save. But there is no financial institution, whether bricks and mortar or
virtual, that can cost effectively provide savings at this amount and frequency. VSLA data
shows that clients who start out saving very little tend to increase their savings amount
annually; a woman saving 10¢ per week in her first year of joining a VSLA will save $1.00 to
$2.00 a week in a year or two. If you aggregate that amount with the rest of her group
members, groups can save $30-$40 per week. At that level, it starts to make financial sense to
begin making loans or to deposit excess savings with a financial institution.

Across Malawi, Uganda and Tanzania VSLAs the average minimum savings amount is
approximately .30¢ per week. VSLAs work on a share system, which allows members to
purchase between 1 to 5 shares per meeting; members are able to save between $0.30 and
$1.50 per week. This flexibility accommodates times of extra income, such as during the
harvest when a member can save more. And in times when resources are scarce, members
can save minimal amounts and still participate in the groups. The share system also allows
poorer members of the community to participate, as they can save smaller amounts (i.e.
purchase fewer shares) than wealthier members or form their own VSLA and set a smaller
share amount. Prior to VSLA, on average adults in the targeted Malawian communities were
able to maintain an annual savings valued at $17.66. Through VSLAs, this same individual in
the same community on average is able to save that amount in 17 weeks instead of 52 weeks.
Performance data from the Management Information System (MIS) developed by
Performance data from the Community Managed Microfinance Management Information
System (MIS) developed by CARE, CRS, Plan, Oxfam and VSL Associates to collect and
assess the performance of groups for management purposes reveals that a VSLA member in
Malawi who has been in the group for an average of 14.4 weeks is able to save an average
$15 over the course and has taken out a loan averaging in the amount of $25. Data from
Tanzania shows that a VSLA member on average is able to save $31.30 over the course of a
23.5 week period. The average loan size of a Tanzania VSLA member is $61. In Uganda a
VSLA member saves an average $26 over the course of 24 weeks and borrows on average
$37.

VSLAs build assets and skills so that the poorest can move into the formal sector. Part
of the reason why banks and MFIs have deemed rural, remote populations ‘unbankable’ is
due to a perceived lack of understanding of basic financial concepts. For the most part,
investments to ensure basic concepts are understood has not yet been made and rural
populations remain unaware of their options to access financial products and the benefits and
risks of access. VSLAs provide a solution to this challenge, through access to savings, credit,
insurance and overall financial management. When a member joins a VSLA they learn key
principles for managing money. Groups establish parameters for savings amounts and
conditions for borrowing. Knowledge gained during the initial group meetings builds
members’ capacity to internally control and benefit from their funds. Through the VSLA,
group members are empowered to understand how their community savings and loan club
functions, how to determine appropriate savings amounts and borrowing guidelines, and rules

for efficient meetings. One of the most useful understandings for members to calculate loan
repayments, the different interest options available as well as how to calculate the share out at
the end of the cycle to determine their profits. Across all of the VSLAs CARE facilitates, the
majority of loans are taken for a period of 3 months repaid with either a flat and declining
interest rate, with flat being the most popular. With flat interest, the earnings are higher and
are returned to the group for on-lending and for share out at the end as profits. VSLA
members are required to pay the interest on their loans at the end of every month but total
principal is generally due at the end of the loan period. There are strict regulations within the
groups that charge fines to members for loans repaid late. Groups determine and adhere to
their own fine amounts some amounting to a percentage similar to the interest rate and others
a flat amount. Clients also learn important cash flow and budgeting skills, and are able to
build a credit history.
On average, VSLA members in Malawi, Uganda and Tanzania receive around 30 percent
return on their savings, representing a significant return through saving in a VSLA which can
not be offered by banks or MFIs.
Statistics from the Government of Uganda show that although poverty levels in the country
have declined from 38% in 2003 to 31% in 2006, poverty in Northern Uganda remains high
at 61% (UBoS, 2007). Data from the SUSTAIN project impact assessment in Uganda
demonstrate improvement in the livelihoods of the VSLA members due to VSLA
involvement. After saving and borrowing through VSLAs, data shows that most members
were able to increase their engagement in productive enterprises such as petty trade, fish
mongering, beer brewing and livestock rearing, as well as start up new business ventures.
VSLA members were able to increase their income by a range of $32.11 to $48.41 within the
first year of the program. Members reported that with the increased income they gained
through business activities, they were able to contribute to household expenses as well as
invest in productive assets. This clearly demonstrates a new ability to cope with normal
expenditures, unforeseen shocks and contribute to relative stability in the households.
Uganda’s National Demographic and Health Survey (UDHS) data from the Ugandan Bureau
of Statistics in 2007 shows that while VSLA participants started out significantly behind the
national average, within a year the proportion of VSL beneficiaries was slightly higher than
the national figures.

VSLA compliments a financial inclusion strategy. CARE’s strategy for financial inclusion
is to look at VSLAs as the foundation and a basic and often necessary first step to move the
excluded into the financial system. In CARE’s savings-led approach, linkage to formal
financial institutions is also savings-led and the continued importance of savings is
emphasized throughout the linkage process. In order to safeguard the interests of clients,
CARE has put in place a set of linkage principals, which is strictly followed in letter and

spirit in all our linkage endeavors. These principals emphasize the need to follow a demand-
driven approach and to have a conservative credit to savings ratio so that clients do not

become over-indebted. These principles also require that the basic features of the VSLA
group, such as group decision making and transparency of transactions, be maintained
throughout the linkage process. Earlier progress to deliberately link VSLAs to formal
institutions within a VSL program in Malawi with Opportunity International Bank of Malawi
(OIBM) and in Rwanda with Union des Banques Populaires au Rwanda (UBPR), has also
contributed to the development of these principles by drawing from lessons gained in the
initial endeavors and general knowledge gained from global microfinance experience when
linking savings groups to the formal sector. The six principles are critical pillars defining the
way forward for CARE in promoting linkages with VSLAs:
Group is linked, not individuals: An important component of the VSLA groups is their
ability to make decisions about the utilization of group funds, and the skills they gain in
managing those funds. Therefore, we recommend that Financial Institutions (FI) lend not to
the individuals in the group, but to the group as a whole. In a traditional group methodology
individuals within a group would apply for a loan, the group would approve the request, and
the FI would fund that loan (with or without their own internal approval process). Experience
has shown that for VSLAs it is more appropriate for the group itself to receive a lump sum
loan into the common pool. Those funds would then be commingled with the group savings
and would be distributed in the same manner. This maintains the group cohesion and
reinforces the growing financial skills of the members. Under this system, the concept of joint
liability is still maintained as in a traditional group lending scheme.
Maximum debt to equity ratio: CARE recommends a maximum debt to equity ratio of 3 to
1 for VSLAs. In previous linkage efforts where CARE has not set this limit, some groups
have become over-indebted which has lead to default and group dissolution.

Balloon repayments: CARE recommends that group loans are repaid in one balloon
payment, due at the time of the scheduled share out. If groups are required to follow a
traditional monthly or biweekly repayment schedule, it slowly decapitalizes the group
throughout the lending cycle. Because the group constantly revolves the loan funds this
decapitalization can be extremely frustrating, as people are likely to want to take larger loans
as the cycle progresses, but may be forced to take smaller loans in order to make repayments
to the FI. Loan documents and group practice should reinforce that external debt be repaid
before shares are distributed at the end of the cycle. Interest can be repaid monthly or
biweekly.
Limit collateral deposits: Some financial institutions require mandatory savings deposits
before loans can be made. These serve a dual function; they encourage a savings culture and
also act as collateral for the outstanding loan. However, VSLAs already have a saving
culture, and have an existing savings pool that acts as collateral for the loan. VSLAs have a
history of receiving high return on their savings, as interest paid on loans is earned as return
on savings during share-out; therefore forced savings with no or little return can undermine
future saving or borrowing. The groups existing financial records of past experience
managing their finances should count towards their financial history and reduce the required
compensating balance.
Minimum age of groups for linkage is 1 year – preferable 2-3 years: Linkage is a
graduation step for some VSLAs. VSLA members use the financial services from the groups
to manage their household economies and to gain important financial management skills.
Most VSLA members have limited demand for high levels of credit when they first join the
groups, as they have limited ability to invest the money productively. It is only once
household finances are stabilized, small income generating activities have grown a bit and
financial skills have been gained that groups are ready and able to take on outside debt.
Linkage is not automatic – it must be demand driven and performance based: Some
groups will never link to external sources of funds, often because the group will be able to
meet its members needs internally. CARE has experience with older groups intermediating
up to $9,000 of their own funds, with members taking loans up to $500. CARE will not
encourage linkage as an automatic next step; it will be based on demand by the members for
additional resources. The linkage step also needs to be based on the performance of the

group. A group that experiences high default rates or is unable to conduct their share-out
without external help is not ready for the added responsibility of external funds. A readiness
assessment tool has been created to analyze the groups’ ability to take on credit from a
financial institution. Currently this tool is being used for the Barclays funded VSL
programming where credit linkages will be explored in the coming year.
Following the development of these principles, CARE has also crafted guidelines for country
programs to strengthen their capacity to engage with formal financial institutions. Since the
launch of Access Africa, a Senior Regional Advisor of Strategic Partnerships was hired to
provide oversight and guidance to the country programs on all linkages being pursued under
the African VSL portfolio.
Financial Education and Other Innovations
One of the key strategies to safeguard the clients of CARE’s savings-led programs is to work
on client’s financial education before linking them to financial institutions. CARE has
developed financial education curriculum contextual to the needs of different countries in
Africa and has prepared a cadre of trainers to provide financial education to the clients of its
savings-led microfinance programs. Currently the financial education curriculum and tools
have been adapted for piloting in Burundi, Malawi and Rwanda.
At the end of every VSLAs’ annual cycle, all outstanding loans are recovered and the loan
fund is shared out. The loan fund (which includes lending profits) is divided by the total
number of savings shares purchased by members during the cycle, to calculate a per-share
value. Each member then receives his or her share according to the number of shares
purchased by that member. Towards the end of a group’s cycle, the members have excessive
amounts of money in the cash box. Consequently, of biggest demand coming from the
VSLAs is the need to store excess liquidity in times before the annual share out. In Malawi,
CARE partnered with OIBM to mitigate the potential theft of their savings when loans are
being repaid and the funds in the box reach their highest by enabling VSLAs to open group
savings accounts. To commence the partnership, CARE supported three currently active VSL
partner organizations to link their VSLAs to three OIBM services outlets. Thus far, as of
December 31, 2010 over 500 VSLAs have opened group savings accounts through three
OIBM outlets, representing, approximately 11,000 people. To date, each of the groups is able

to save an average of $50 or roughly $2.40 per member. The account has to maintain a
minimum account balance of $3.35. Deposits can be made in amounts as low as 0.67 cents.
Although a service not widely available in rural Tanzania, CARE partnered with Vodacom in
late 2010 to introduce group based M-Pesa accounts on a pilot basis to VSLAs in 3 northern
districts. The project and Vodacom Tanzania have now co-trained a total of 39 VSLAs on the
use of M-Pesa as a standalone ‘savings’ product. Approximately 60% of all VLSA groups
who received training in M-Pesa decided to open accounts. Under this linkage, the VSLAs
open an M-Pesa account as a group, and use it for the safe storage of excess funds. So far, 24
VSLAs have opened group M-Pesa accounts, and one new M-Pesa agent has been created at
the urging of the pilot VSLAs. Some VSLAs are showing evidence of using their M-Pesa
account to save up funds for the bulk purchase of agricultural inputs. The typical cost of
storing cash in M-Pesa is 1 – 1.5% of the amount transacted.
To date through the M-Pesa system, there have been 52 deposit transactions averaging $108,
and 36 withdrawal transactions averaging $106.1 The average balance of group M-Pesa
accounts as of December 31

st, 2010 was $76 or about $3.50 per member. Since the
partnership launched, many more groups outside the three targeted districts have approached
Vodacom and opened VSLA M-Pesa group accounts without having received any training or
sensitization on the M-Pesa product from CARE.
It appears that M-Pesa services are in high demand in semi urban and rural (remote) areas.
Groups that have joined M-Pesa have encouraged local businesspeople to register as M-Pesa
agents which has enabled groups in remote areas to benefit from M-Pesa services locally.
Several challenges have been encountered however during the initial implementation which
will benefit other money wallet providers to understand how to interact with groups and
individuals in remote locations. Lessons include:

 Education on the product, its costs and opportunities requires time and an upfront
investment. However, once group members know how the system works and the
benefits, word of mouth spreads and the next range of users require less training.

 The availability and placement of M-Pesa agents is crucial to reach vast numbers.
VSLA members can help identify new agents in their local community.
 The availability of cash holdings in small bills is key in rural areas where transaction
volumes may be high but transaction amounts are small.
VSLA groups are by definition informal. Policy frameworks should allow for the
smooth transition for informal VSLA groups to access formal services. CARE has
encountered regulatory difficulties in many countries as it tries to link VSLA groups to banks
and MFIs. Some governments try to encourage VSLAs to transform into cooperatives.
However, this is a level of organization that most VSLA members are not prepared for or
willing to undertake. Nor are there advantages to do so as many of the benefits of VSLAs –
transparency, no costs, trust amongst a small group – can be lost with formalization or
federation. Most VSLAs want to maintain their groups and are simply looking for a safe
place to deposit excess liquidity or access to a larger loan fund at certain times. Other
countries require VSLAs to go through a lengthy and expensive registration process as a
small enterprise in order to link to financial institutions. Not only is this expensive, but it
requires VSLA’s to change their management structure and can decrease transparency.
CARE advocates for a simple, local registration process that allows the group to maintain its
structure and governance models. Countries such as Kenya already allow for this, and it
significantly facilitates the process of linkage between VSLAs and banks. This simple
registration process allows banks to meet their AML/CFT (anti-money laundering and
combating the financing of terrorism) obligations without creating additional expenses and
unforeseen burden on the groups. National governments are encouraged to issue clear
guidelines allowing for the linkage of informal savings groups with regulated financial
institutions.

Savings led approaches allows people to enter the formal financial sector as savers rather than
borrowers. Greater outreach of savings services not only reduces the cost of funds for a
financial institution, but experience has shown that these small savings are far more stable in
times of crisis bringing greater stability to the financial institution and the financial sector
overall. Expanding savings clients also benefits financial institutions’ leverage ratios. Savings
and in particular micro-savings should therefore be seen not just as a service that poor need,
but one which also benefits the financial sector.

One of the most important and exciting features of VSLA is change. Clients join VSLAs
saving small amounts, cautious about borrowing and with few ideas for investment to
generate a return. Over time members increase their savings, grow businesses and are
empowered to network with their local leaders, engage in decision making in their
households as well as interact with the formal financial system. Data from the Village Agent
performance assessment reveal that the majority of VSLA members in Malawi engage in
farming activities. Participation in VSLAs allow them to plant additional crops and
sometimes engage in new income generating activities. In 2012, impact assessments from the
Malawi and Uganda RCTs will reveal the details of the changes in the VSLA members’ lives.
The data will provide information on changes in food security, asset levels, the ability to cope
with shocks, and changes in household savings.
It is imperative that we develop an approach to financial inclusion that values the skills and
assets VSLA members build over time and see VSLAs as an important, and often necessary,
rung on the ladder of financial inclusion.

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