There is a significant number of Ugandans, probably measured in the millions, whose level of economic activity is insufficient to make them interesting clients to banks, MFIs, or SACCOs. This group has credit needs in the range of 5,000 to 50,000 Uganda shillings ($2.50 to $25) and limited savings capacity. These people have multiple economic activities usually including subsistence agriculture. The limitation on their economic activity is not an absolute lack of wealth as much as lack of monetisation. Village Savings & Loans Associations (VSLAs) have proved particularly suitable for meeting the financial needs of these people.

VSLAs are Accumulating Savings and Credit Associations (ASCAs) with a particularly rich methodology that has been tested with hundreds of thousands of saver-borrowers, notably but not exclusively in Niger, Tanzania and in Zimbabwe. They typically have about twenty-five members. They save and borrow for about a year, then distribute their retained earnings, then dissolve themselves, only to reform immediately after. The moment of dissolution and reforming is the occasion at which people to leave or enter the group, and the members readjust savings requirements, loan amounts, interest rates, or other elements of the institution. The VSLAs have some clear advantages over other institutional forms for the populations they serve and for their partners:

  • They provide not only loans, typically for one or two months and typically with interest rates at 5-10% a month, but also offer a real savings alternative. The short lending cycle means that savers’ funds are fairly liquid, and the high interest rates earned on savings (30% to 60% return, compared to about 1-3% p.a. elsewhere) make saving an interesting option.
  • They appear to have a good safety record: the involvement of all members of a small self-selected group in governance largely protects against elite capture and defaults.
  • Interest payments and fees do not leave the area to support a distant home office. Except for a small amount sometimes paid to the trainer, all funds stay in the community.
  • They can work at various levels of financial activity including extremely low levels, and there is nothing in their structure either inciting people towards or discouraging them from larger transactions.

VSLAs also have drawbacks. They have limited savings and borrowing options compared to modern MFIs, though they offer a more appropriate menu of options than minimalist programmes. There is active debate on whether the cost-per-member compares favourably or not with other options. Typically, the big implementing international NGOs cost USD 20-25 per member; some practioners believe it is possible to reduce that cost by half or more. Similarly, there is lively discussion about the risks and benefits of linking these groups with financial institutions.

Once the training has been completed, the VSLA methodology becomes almost part of the culture, and not infrequently, well-trained groups pass the methodology on to new members, so that the number of participants can be greater than the number of people trained. People with no formal education can master the management tasks.

FSDU, CARE and CREAM started a pilot scheme to introduce a standard model VSLA in Moyo and Yumbe districts from 2004.

An evaluation of the pilot was done by Hugh Allen who made several important recommendations in the following report.
VSLA Pilot Project Review Report  by Hugh Allen

On the basis of the Consultant's report, FSDU proceeded to work towards rolling out the programme to other parts of Uganda. A VSLA Steering Committee was created with membership by stakeholders working with VSLAs such as Plan International, CARE, Microfinance Outreach Plan, CRS and others. CARE formed a Common Support Facility to provide Technical Assistance in the roll out of VSLAs. DFID has contracted CARE through FSDU to implement the roll out by subcontracting with a number of local institutions to form, support and monitor VSLAs. The progress of this roll out is in this report: The VSLA 2006 Annual Report

In addition, FSDU is providing direct support to the Uganda Women’s Effort to Save Orphans (UWESO) to improve their rapidly growing programme. UWESO promises a somewhat lower cost per member, and has adopted some of the latest elements of VSLA practice, including daily savings and ledgerless bookkeeping.

FSDU co-funded and participated in the design and execution of one of the most credible studies to date of VSLA programmes, that of Zanzibar, where the implementing partner, CARE, had pulled out, leaving the programme on its own. The evaluation showed steady growth with overall good quality in the absence of on-going technical or financial support, largely confirming some of the claims that are made about the viability of the VSLA approach.

Village Savings and Loan Associations - experience from Zanzibar

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