Microfinance Practice: Re: [MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations

Hi Richard

So glad to hear from you on this list serve.

I have not come across any research focused on understanding repayment rates of VSLAs loans versus MFI loans but the following are certainly contributing to higher VSLA loan repayment than to MFIs:

● As you rightly put it, the interest comes back to the group when a loan is borrowed from the VSLA and this is a motivation for them. When I first facilitated VSLA linkages to OIBM and MRFC around 2005, groups kept complaining that the interest they paid when they borrowed from their group came back to the group as income while that paid to an MFI was a cost to the group/members.

● At times, the timing of loans did not meet group needs. For example, loans applied for in May or June were approved late which coincided with the onset of rains. Businesses thrive seasonally because most VSLA clients prioritize farming during the rainy season. At this time, it is agricultural loans that are on demand. VSLAs on the other hand respond to needs of VSLAs timely as long as funds are available.

● Another area you may look at is how your institution addresses the needs if VSLAs when developing financial products. Is it demand driven?

● What delivery channels are employed. At times clients were assured that loans would be collected at their meeting locations close to their homes. Groups had repayments ready for collection but no one went up to collect. Next, they discovered that their loan installment was marked as overdue. Three office bearers ended up using public transport to go and repay at the main branch far from where they operate and this became expensive for them.

There is need for an indepth study or random interviews to capture specific reasons on this isdue from groups.

I am in Lilongwe and we can chat if needed. My contact is:

0993868532

Sophie Chitedze

Independent Consultant

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From:"richard chongo rigochongo@yahoo.co.uk [MicrofinancePractice]" <MicrofinancePractice@yahoogroups.com>
Date:Mon, 29 Jun, 2015 at 17:19
Subject:[MFP] Understanding default rates in MFI's group loans and Village Savings and Loans Associations

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 Chongo
Social Performance Manager
Opportunity Bank Malawi