The perception that microfinance is improving the lives of low income families has been a hot topic among development professionals for the last decade. There are many debates and arguments in the media about whether microfinance has positive or negative impacts on the livelihoods of economically disadvantaged communities. There is no one right answer to this question. It all depends on the institution’s mission and purpose. In fact, there are various financial services providers who have been part of the movement for all these years, some for social reasons some for profit.
In spite of these evolutions in microfinance over the decade, I believe microfinance is essential for low income families, particularly if they participate in management of the institution as well. I would like to tell you about village savings and loan associations (VSLAs) established by female farmers with technical assistance of the GROW project in the communities of Upper West region of Ghana. I was amazed to see such simple but powerful products the associations offer for their members. I witnessed the power of client participation that makes the delivery so straightforward and flexible.
The Greater Rural Opportunities for Women (GROW) project is being implemented in the Upper West region of Ghana by Mennonite Economic Development Associates (MEDA) to promote food security, diverse agricultural productivity, increased marketing, and improved nutritional practices, for over 20,000 smallholder women farmers and their households.
GROW began in 2012, using market-driven approaches to improve the soya value chain. The six-year project funded by Global Affairs Canada (GAC) is aimed at improving food security for families in Northern Ghana by assisting women farmers to increase productivity, linking female farmers to sustainable markets, and creating greater nutrition awareness among clients.
It was my third visit to GROW project areas in the last year, to work with the financial services provider institutions that GROW supports. I feel lucky as a microfinance consultant to have this opportunity. I have witnessed one more time that the community-based microfinance institutions owned and managed by people themselves, such as VSLAs, are more effective and beneficial to its members and it is not difficult to observe it. I have met with eight VSLAs and had group interviews with about 103 female members altogether in Dupare, Buru, Wajia and in some communities of Tumu, and individually interviewed about 24 female farmers to understand how they benefit from VSLAs.
Village savings and loan associations developed and supported with the technical assistance of GROW key facilitating partners (KFPs), are community-based and member-owned institutions serving the financial needs of the female farmer. MEDA KFPs – CAPECS, TUDRIDEP, CARD, ProNet and PRUDA – provide regular support and guidance for female farmers to establish and run their own VSLAs. VSLAs are providing a venue for female farmers to save and borrow money for their personal and business needs. They are also helping female farmers create credit history and savings – a process that is necessary for accessing financial services from the local microfinance institutions.
I am particularly proud for MEDA for such beneficial work that simply adds value to the lives of people who otherwise would not have this opportunity. In each GROW project community, MEDA and its local development partners provide technical assistance for people to set up their own VSLAs. A VSLA usually has 15-30 female members in a community. Members get the opportunity to save regularly, and to invest their savings to generate additional income through lending to members who need loans.
The interest earned is evenly divided among members at the end of each year. The internal loans are much cheaper than members could receive from external lenders, and easy to access. For example, a loan from an external MFI costs a minimum of 3% per month in these areas. For a VSLA loan, you pay 1 Ghana Cedi (GHS) for each 100 GHS you borrow, which basically makes interest 1% per month. It is three times cheaper than the market.
Members can save in two ways, compulsory and voluntarily. The compulsory savings is a condition to be a member and is usually 5-10 GHS per week. A member will save up to 260-520 GHS per year ($56-$113). The amount of voluntary savings is up to each member to decide. It may vary between 5 and 20 GHS or little more, based on the interviewed members’ responses. It works like a term deposit.
The member and VSLA management agree on the savings amount and the term of deposit. The members may also make a demand deposit directly to the VSLA’s bank account, housed in one of the local MFIs, during harvest times when they have some accumulated cash. In addition, there is a compulsory collection of 1 GHS weekly per member for the VSLA’s emergency fund. Members receive monetary support from this fund for funerals in case of the death of a close family member.
Most people I have interviewed mentioned that they save with VSLAs and also take a loan when they need one. Savings are usually used to buy new clothes and study materials such as text books, note books, and other things for their children for a new school year, for farm inputs for the next farming season, for farm equipment, or paying for transportation, medical treatment and other reasons. Loans are used in a similar way, depending on the person’s income levels. If a member loses some of their working capital, they use their savings for business activities and borrow to cover family expenses such as education. According to the interviewed members, they usually borrow once or twice a year. The amount varies from 50-700 GHS ($10-$150).
Members still apply to formal MFIs for larger loans because VSLAs don’t have enough capital. However, VSLAs are adequately covering the needs of members for smaller and shorter-term loans. MFIs wouldn’t be able to offer loans with this much flexibility and at such a low cost.
This is a great example of a community-based institution that is easy to access and valuable for the lives of people, yet simple enough to be managed by female farmers themselves.