Richard,
Thank you for your most thoughtful response which nicely summarizes many of our posts over the past days. As Hugh has commented earlier, linking VSLAs (aka Savings Groups) to banks is a dangerous undertaking (for the groups). Assuming the groups need more money - often they have a reserve that is not lent out - they could easily grow their fund by saving more. I believe that individuals should take out loans from banks and MFIs if they want if they in no way put the group's fund at risk. I think that individual savings deposits are a good idea as well and some groups want to park their growing fund in a bank. This is all to the good.
Yet banks are aggressively lending to groups using their savings fund as collateral and creating a dependency on outside funding for what they could do themselves. This is what I observed in Guatemala as Compartamos started to work in that country:
- Hire the staff that trained the groups
- Give them a higher salary and bonuses for the groups they bring to the banks
Is this "financial inclusion". This is just banks seizing what seems like a good businesses opportunity and patting themselves on the back for their nobility. Instead of the world's poor making a profit the banks make a profit.
Makes you wonder, doesn't it,
Jeff
Jeffrey Ashe
jaashe@aol.com
-----Original Message-----
From: richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice] <MicrofinancePractice@yahoogroups.com>
To: MFP <microfinancepractice@yahoogroups.com>
Cc: hugh <hugh@vsla.net>
Sent: Tue, Jun 30, 2015 8:37 am
Subject: [MFP] Re: Understanding default rates in MFI's group loans and Village Savings and Loans Associations
Greetings to all,
I really feel enlightened by the depth of knowledge that you have shared on the topic, and I am glad I belong to this group.
Chuck thank you for the insightful explanation, and I will always bemoan the phasing out of MFT, it helped to bring sanity to the world of financial pricing. I should say (in agreement to Hugh) that the amounts that VSLA members borrow have increased significantly. I have interacted with group members in Malawi that borrowed at least $50 per member of course with a repayment period of one month with some groups charging a 20% interest rate per month. Also, some MFIs are lending as low as $10 to be repaid in a minimum period of 4 months (of cours e no client borrows this little amount from MFIs anymore though the option is available). If the average loan size is increasing as such, is it really a good idea to promote SHG's or VSLA's linkages to "formal" financial services? And at what point do SHGs and/or VSLAs become formal, if they are not already? I look forward to the MFT articles in July.
Thank you for the information on external funds concept, Srinivan. Some MFIs and banks use that concept as a marketing tool to link VSLAs to their institutions. They say that the VSLAs do not have (or save) enough funds in their groups to make a significant progress in their economic life, as such they should borrow from the bank huge amounts of money that they can use to on-lend to their members at a higher interest rate or invest in a big group business (like buying a maize-mill) which they couldn't buy or invest in with the members' funds only. However, your impression shows that this would have a bearing on default rate.
It is nice to hear from you Sophie. We met once when you came to our office in Lilongwe in 2012/2013. I am tempted to think that MFIs should design their products with the VSLA kind of thinking at the back of their mind in order to benefit from the better repayment rate (as Jeff says to be "flexible, convenient and reliable". For example, in subsequent loan cycles, an MFI can disburse a loan within a day or two of loan application so that it coincides with the business needs of the applicants. Also MFIs can promote the use of digital financial services such as agency banking to increase convenience/or reduce transportation costs for clients at a cheaper rate (though a report by Better Than Cash Alliance shows that only 0.3% of all transact ions in Malawi are made through electronic payments systems).
And, I see a psychological aspect that contributes to the better repayment rate in VSLAs as Hugh has said that the members know that they are borrowing the neighbours' money. However, maybe if the same members in the same community borrow from the bank or deposit-taking MFI or any MFI, they think it's just money maybe not necessarily belonging to the depositors who might be their neighbours as well.
Once again, thank you colleagues for the insight.
Dear all,
Last week as I worked with NGOs working with VSLAs linking them to micro-finance banks, a thought crossed my mind on how these VSLAs manage their loans.
I have noticed that the interest rates for loans that members charge each other is very high, maybe between 200% and 500% higher, than the rates that MFIs charge. However, my rough sight shows that the repayment rate in VSLAs is far much better than in group lending in MFIs.
Is there any research or information that analyses the default rates in VSLAs in comparison to MFIs group lending? I would love to see if my assumption is correct and what issues surround the better repayment record in VSLAs. Is it because the VSLA members are motivated that it is their money they are growing and they will share the funds at the end of the period?
Best regards,
Richard Cho ngo
Social Performance Manager
Opportunity Bank Malawi
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